Are nonresident alien students with F-1 or J-1 visas and employed by a U.S. company required to have federal income taxes withheld from their paychecks

Yes, nonresident alien students with F-1 or J-1 visas and employed by a U.S. company are generally required to have federal income taxes withheld from their paychecks.

Legal Reasoning and Rationale:

1. General Withholding Requirement:
   According to IRS guidelines, wages and other compensation paid to a nonresident alien for services performed as an employee are usually subject to graduated withholding at the same rates as resident aliens and U.S. citizens, unless specifically excluded from the term "wages" by law or exempt from tax by treaty (IRS FAQ, Publication 519).
2. Form W-4 Instructions:
   Nonresident aliens must follow modified instructions when completing Form W-4. They must:
   • Not claim "exempt."
   • Use single status even if married.
   • Claim only one allowance (with a few exceptions).
   • Write "nonresident alien" or "NRA" on line 6 (Publication 519, IRS FAQ).
3. Special Payroll Rules:
   Nonresident aliens are subject to special payroll rules that include:
   • Claiming only one personal exemption.
   • Filing using single or married-filing-separately rates.
   • Not claiming the standard deduction (except for students from India).
   • Not being eligible for certain tax benefits like the Making Work Pay tax credit (Publication 519, IRS FAQ).
4. Phantom Gross-Up:
   Employers must calculate federal income tax withholding on wages under a special procedure that includes adding an amount to the wages of nonresident employees to offset the assumed standard deduction that is incorporated into the wage tables (Publication 519).
5. Exemptions from Withholding:
   Nonresident aliens claiming a tax treaty withholding exemption for compensation should file Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual (IRS FAQ, Publication 515).
6. FICA and Medicare Taxes:
   Generally, services performed by nonresident aliens temporarily in the United States under F, J, M, or Q visas are not covered under the Social Security program if the services are performed to carry out the purpose for which they were admitted to the United States. This means there will be no withholding of Social Security or Medicare taxes from the pay received for these services (Rev. Rul. 67-159, Publication 519).

Conclusion:

Nonresident alien students with F-1 or J-1 visas employed by a U.S. company are required to have federal income taxes withheld from their paychecks, following specific guidelines and exceptions as outlined by the IRS. They must complete Form W-4 with special instructions and may need to file Form 8233 if claiming a tax treaty exemption.

Sources:
Publication 519 (2023)
Publication 515 (2024)
§ 1441. Withholding of tax on nonresident aliens
Rev. Rul. 67-159
Publication 4152 (10/2023)
U.S. Tax Rules for Paying Foreign Employees