OPT Tax vs. H1B Tax: What Are the Main Differences?

Individuals working in the United States on different nonimmigrant statuses face distinct tax obligations. Optional Practical Training (OPT) provides temporary employment authorization to F-1 students to gain practical experience in their field of study, while the H1B visa is for foreign professionals in specialty occupations. The transition from an F-1/OPT to an H1B visa marks a shift in an individual’s relationship with the U.S. tax system, affecting the taxes owed, the income subject to taxation, and the forms used for filing.

Taxation During Optional Practical Training (OPT)

An individual’s tax residency status is a primary determinant of their U.S. tax obligations. For those on an F-1 visa participating in OPT, the classification is typically a “nonresident alien” for tax purposes. This status is not related to their immigration standing but is a specific definition used by the Internal Revenue Service (IRS).

The IRS uses the Substantial Presence Test to determine if a foreign national should be taxed as a U.S. resident. However, F-1 visa holders are considered “exempt individuals,” meaning their days of presence in the U.S. do not count toward this test for their first five calendar years. This five-year exemption is the reason most individuals on OPT retain their nonresident alien tax status.

A benefit of being a nonresident alien F-1 student is the exemption from Federal Insurance Contributions Act (FICA) taxes. FICA taxes fund the Social Security and Medicare programs and consist of a 6.2% Social Security tax and a 1.45% Medicare tax on employee wages. This exemption applies as long as the individual is a nonresident alien and the work is permitted under their F-1 status.

Should an employer mistakenly withhold FICA taxes, the individual should first request a refund directly from the employer. If the employer is unable to provide a refund, the individual can file Form 843, Claim for Refund and Request for Abatement, and Form 8316, Information on Request for Refund of Social Security Tax Erroneously Withheld on Wages Received by a Nonresident Alien on an F, J, or M Type Visa, with the IRS.

As nonresident aliens, OPT participants are taxed only on their U.S.-sourced income. They must file their annual tax return using Form 1040-NR, U.S. Nonresident Alien Income Tax Return. All F-1 students, regardless of whether they earned income, must also file Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, to claim their exemption from the Substantial Presence Test.

Taxation Under an H1B Visa

Upon transitioning to an H1B visa, an individual’s tax situation changes because they are no longer considered “exempt individuals” for the Substantial Presence Test. Days of presence for H1B holders count towards the test from their first day in this status. The test is met if they are physically present in the U.S. for at least 31 days in the current year and a total of 183 days over a three-year period, using a weighted formula.

By meeting the Substantial Presence Test, an H1B holder is classified as a “resident alien” for tax purposes and is taxed in the same manner as U.S. citizens. The immediate consequence is the loss of the FICA tax exemption. H1B workers are subject to the full 7.65% FICA tax withholding from their paychecks, and their employers contribute an equal amount.

Another change is the scope of taxable income, as resident aliens are taxed on their worldwide income. This requires them to report income from all sources, both inside and outside the United States, on their U.S. tax return. This can include foreign bank interest, rental income from property abroad, and wages earned in other countries.

As resident aliens, H1B holders file their taxes using Form 1040, the standard U.S. Individual Income Tax Return. This brings advantages not available to nonresident filers, such as claiming the standard deduction. They can also access a wider range of tax credits, like the Child Tax Credit and education credits, assuming they meet the specific eligibility requirements for each.

Key Tax Differences Summarized

The shift from OPT to H1B status brings several tax distinctions. The primary change is in tax residency, as an individual moves from being a nonresident alien to a resident alien. This reclassification triggers other adjustments.

A major financial impact is the change in FICA tax liability, as the exemption for F-1 students ends upon becoming an H1B visa holder. The base of taxable income also expands from U.S.-sourced income to worldwide income.

These differences are reflected in the tax forms used, with a switch from Form 1040-NR to the standard Form 1040. H1B holders also gain access to benefits like the standard deduction and a broader array of tax credits.

Navigating a Transition Year

The year an individual changes status from F-1/OPT to H1B often presents a complex tax situation. If the change occurs mid-year, the person is considered a “dual-status alien” for that tax year. This means they are treated as a nonresident alien for one part of the year and a resident alien for the other.

For example, if an individual’s H1B status begins on October 1, they are a nonresident alien from January 1 through September 30 and a resident alien from October 1 through December 31. This requires a specific filing procedure to account for both periods.

The tax return filed for the year is determined by the individual’s status on the last day of the year. If they are a resident alien on December 31, they will file Form 1040 as their main return, writing “Dual-Status Return” at the top. They must then attach Form 1040-NR as a statement, showing the income and deductions for the portion of the year they were a nonresident alien.

A restriction for dual-status filers is that they are not permitted to take the standard deduction and must instead itemize any allowable deductions. During the nonresident portion of the year, only U.S. source income is reported, and FICA tax exemptions apply. For the resident portion, worldwide income must be reported, and FICA taxes are applicable.

Because of these complexities, many tax preparation software programs do not support dual-status returns, often requiring individuals to seek specialized assistance or file by mail.