Executive Summary
Many F-1 international students participate in post-graduate employment through the Optional Practical Training (OPT) program. While in OPT, some are exempt from Federal Insurance Contributions Act (FICA) taxes, relieving both them and their employers from Social Security and Medicare contributions.
- Each year from FY2017-2022, an average of 330,000 students participated in OPT. 85% of those OPT participants are exempt from FICA for at least some of the year.
- Closing the FICA exemption, as proposed by Senator Tom Cotton in the OPT Fair Tax Act (S.2940), would increase federal revenue by $27–$36 billion over ten years, with a central estimate of $32 billion.
Background
Optional Practical Training (OPT) allows most international graduates of US universities to work in the United States after graduation on their F-1 visa. Standard OPT provides up to 12 months of work authorization, with an additional 24-month extension available to graduates in science, technology, engineering, and mathematics (STEM) fields.
Certain OPT participants are exempt from taxes for Social Security and Medicare contributions. Specifically, provisions under the Internal Revenue Code typically provide that nonimmigrant visa holders are considered resident aliens for the purpose of collecting federal taxes, provided they spend a sufficient amount of time physically present in the United States (determined by the “substantial presence” test). However, F-1 students are exempt from counting their presence in the United States for the first five calendar years in the United States, meaning many are not considered residents for tax purposes during at least some of their time on OPT.
Employers can pass some of the cost of the employer-side FICA contribution onto workers in the form of lower salaries, but to the extent they can’t, the FICA exemption creates an incentive to hire foreign workers over Americans. What’s worse, this subsidy for foreign workers applies disproportionately to lower-skilled OPT participants (bachelor’s graduates and master’s graduates) compared to higher-skilled OPT workers (PhD graduates), who are much less likely to be FICA-exempt because of their longer programs.
Understanding the FICA Exemption
The Federal Insurance Contributions Act (FICA) is by far the most significant wage-financed social insurance program in the United States, and it applies broadly to all US tax residents. FICA requires that a total of 15.3% of resident workers’ wages be paid into Social Security and Medicare, split evenly between employee and an employer. However, there are limited exemptions from FICA, such as for nonimmigrants in F, M, J, or Q visa statuses.
International students begin paying FICA taxes only after they become US tax residents as determined by the Internal Revenue Service’s (IRS) Substantial Presence Test, which counts the days spent in the United States. Importantly, time in F-1 status is not counted toward this test until a student has been in the country for any part of five calendar years. As a result, wages earned within this window are exempt from FICA, while earnings after the window closes are taxed like those of other workers. The exemption applies to both the employer and employee: neither is required to pay the standard 6.2% Social Security tax on wages up to the statutory cap, nor the 1.45% Medicare tax that applies to all wages.
The amount people worked is available in the Student and Exchange Visitor Information System (SEVIS), which tracks student’s studies and employment for the duration of their F-1 status. Because SEVIS also reports when someone’s status began, we can also determine the periods during which someone’s work was within the five year window of the FICA exemption. In Table 1 below, we present the average number of F-1 students participating in OPT (each year from FY2017-FY2022, the average time those students worked on OPT, and the average share of that time that was exempt from FICA taxes.
A consequence of the five year rule is that the longer a student remains in an academic program, the more likely it is that their OPT authorization falls outside the FICA exempt period, leading them to be taxed normally. This results in the post-graduation employment of PhD students being taxed more often than that of undergraduates or master’s students.
A typical bachelor’s student pursuing four years of study followed by one year of post-completion OPT remains exempt from FICA the entire time. If the typical student receives a STEM extension, however, they generally pay FICA taxes during the up to two additional years of employment allowed by the extension.
The opposite trajectory holds for graduate students pursuing a master’s degree, as opposed to a PhD. Master’s students pursuing a standard program plus a year of post-completion OPT won’t be present for five calendar years, so they rarely enter taxable status. Meanwhile, the FICA exemption for doctoral students, who take four to seven years to graduate, has usually expired by the time they begin post-graduate employment.
As can be seen in Table 2 above, exempt status varies widely by OPT participants’ program, and whether they are on 12-month post-completion OPT or the STEM OPT extension. Because bachelor’s programs typically take four years, over two-thirds of the time that bachelor’s graduates work on 12-month post-completion OPT is FICA-exempt, but by the time of the STEM extension, bachelor’s grads are generally considered residents for tax purposes, with only 24.3% of the time they work on STEM OPT considered FICA-exempt.
Because master’s programs are so short, the vast majority of OPT participation is FICA-exempt (99.1% of the time spent by master’s grads on 12-month post-completion OPT, and 88.1% on STEM OPT). By contrast, because doctoral degrees take longer, 23.9% of 12-month OPT is FICA-exempt and only 4.7% of STEM OPT.
Estimating Tax Revenue
Having established how the FICA exemption functions for F-1 students, we next quantify the fiscal impact of closing the FICA exemption, as proposed in the OPT Fair Tax Act (S.2940). To estimate the federal revenue that could be raised, we first estimate the taxable income of OPT workers, identify the portion of it that is currently FICA-exempt, and then compute how much additional revenue would be raised by taxing that portion like US residents.
1. Taxable Income
To calculate the yearly federal tax revenue that could be raised by ending the FICA exemption, we take the representative OPT participant, approximate their annual salary, identify how many months they worked in FICA-exempt status, and then straightforwardly multiply that by the number of OPT participants and the effective 15.3% FICA tax rate.
To estimate how much to F-1 students earned on OPT, we work backwards from the earnings reported on initial cap-subject H-1B petitions filed between FY2021-2024 on behalf of F-1 students. These I-129 petitions are filed on behalf of workers, and indicate whether the beneficiary has an existing status and what it is. This allows us to look at the salaries of initial H-1B workers transitioning from student visas (i.e., the earnings of people in their first year after OPT). Because they are likely to earn more after having been tested in the labor market, we combine these earnings data with the Social Security Administration’s age-earnings profiles to back project their likely earnings the previous year. We take this to be a reasonable estimate of the average salary earned by OPT participants. We estimate average salaries of $90k for recent bachelor’s graduates, $102k for recent master’s graduates, and $132k for recent doctoral graduates.
To go from annual wages of OPT workers to actual earnings requires information on how much students actually worked while on OPT. We already calculated this from SEVIS data in Table 1 above. In line with traditional fiscal scoring assumptions, we make the static assumption that OPT participation is not changed by ending the FICA exemption. Given that the value of OPT participation is likely conceived of by participants as access to the US labor market and transitioning onto a work visa, this static assumption is likely fairly realistic.
Multiplying the total number of FICA-exempt work months by estimated monthly wages gives the amount of income earned while shielded from FICA. Applying the combined employer-employee FICA rate of 15.3 percent yields the annual revenue that could be raised.
2. Ten Year Revenue Estimate
Creating a ten year fiscal score requires estimating how the additional FICA revenue raised each year evolves over time. We assume that the number of students working on OPT remains constant over the next decade, an intentionally conservative assumption, but that OPT salaries increase. We estimate this rate of increase by assuming that OPT workers’ earnings grow annually at the historical rate observed in the wages of I-129 petitions for former F-1 students from 2021 to 2024. These growth rates appear in Table 4.
The described methodology produces a ten-year fiscal score of taxing OPT participants like other US residents. We find that eliminating the FICA exemption for OPT workers, as proposed in the OPT Fair Tax Act (S.2940), would increase federal revenue by $27–$36 billion over ten years, with a central estimate of $32 billion.
