Navigating the U.S. tax system can be complex, especially for E-2 visa holders. The E-2 visa is a non-immigrant visa for investors and business owners from treaty countries who wish to invest a substantial amount of capital in a U.S. business. Understanding the tax obligations that come with this visa is crucial for compliance and financial planning. This article will delve into the various taxes that E-2 visa holders need to be aware of, answering the question “do e2 visa holders pay taxes?” and providing insights into E-2 visa taxes, helping them to manage their responsibilities effectively while maximizing their business potential in the United States.
Do E2 visa holders pay taxes?
Let’s explore the specific taxes E-2 visa holders are subject to and how they can ensure they meet all necessary tax requirements.
Federal income taxes
E-2 visa holders are subject to U.S. federal income taxes on their worldwide income, similar to U.S. citizens and permanent residents, if they meet the substantial presence test. This test generally considers the number of days an individual is physically present in the U.S. over a three-year period. If an E-2 visa holder meets this test, they are classified as a U.S. tax resident and must report all income earned, both inside and outside the U.S.
Substantial presence test
The substantial presence test requires an individual to be physically present in the U.S. for at least:
- 31 days during the current year, and
- 183 days during the three-year period that includes the current year and the two preceding years, counting:
– All the days they were present in the current year,
– 1/3 of the days they were present in the first year before the current year, and
– 1/6 of the days they were present in the second year before the current year.
Nonresident alien status
If an E-2 visa holder does not meet the substantial presence test, they are considered a nonresident alien for tax purposes. As a nonresident alien, they are only required to report and pay taxes on income that is effectively connected with a U.S. trade or business, as well as certain types of U.S.-sourced income such as interest, dividends, and rental income. Nonresident aliens typically file Form 1040-NR, U.S. Nonresident Alien Income Tax Return, and are subject to different tax rules and deductions compared to U.S. tax residents.
Federal income tax rates and brackets for 2024
For E-2 visa holders who qualify as U.S. tax residents, federal income tax rates for 2024 are as follows:
| Tax rate | Single filers | Married couples filing jointly |
|---|---|---|
| 10% | Up to $11,000 | Up to $22,000 |
| 12% | $11,000 to $44,725 | $22,000 to $89,450 |
| 22% | $44,725 to $95,375 | $89,450 to $190,750 |
| 24% | $95,375 to $182,100 | $190,750 to $364,200 |
| 32% | $182,100 to $231,250 | $364,200 to $462,500 |
| 35% | $231,250 to $578,125 | $462,500 to $693,750 |
| 37% | Over $578,125 | Over $693,750 |
For example, if an E-2 visa holder who qualifies as a U.S. tax resident earns $120,000 in 2024:
- The first $11,000 is taxed at 10%: $1,100
- The next $33,725 is taxed at 12%: $4,047
- The next $50,650 is taxed at 22%: $11,143
- The remaining $24,625 is taxed at 24%: $5,910
The total federal income tax would be: $1,100 + $4,047 + $11,143 + $5,910 = $22,200
Filing Requirements and Deductions
E-2 visa holders must file Form 1040, a U.S. Individual Income Tax Return, if they are considered U.S. tax residents. They can take advantage of deductions and credits available to U.S. residents, such as the standard deduction, itemized deductions, and child tax credits. Nonresident aliens, on the other hand, file Form 1040-NR and can only claim deductions directly related to U.S. income.
Understanding these distinctions is crucial for E-2 visa holders to ensure they file correctly and take advantage of any applicable tax benefits.
State and local taxes
In addition to federal income taxes, E-2 visa holders must also consider state and local taxes. Each state has its own tax laws, and the requirements can vary significantly depending on where the E-2 visa holder resides or operates their business.
State income taxes
Most states impose an income tax on residents and those earning income within the state. E-2 visa holders who meet the residency requirements of a state or earn income from a business located in that state will need to file a state income tax return. The residency requirements typically include physical presence in the state for a certain number of days or maintaining a permanent place of abode within the state.
Some states have no income tax, such as Florida, Texas, and Nevada, which can significantly impact the overall tax burden for E-2 visa holders.
Local taxes
Certain localities also impose taxes, which may include city or county income taxes, property taxes, and business taxes. These local taxes are in addition to state and federal taxes and can vary widely depending on the location. E-2 visa holders should check with local tax authorities to understand their obligations.
Employment taxes
E-2 visa holders who own and operate businesses in the U.S. are responsible for employment taxes if they have employees. This includes Social Security and Medicare taxes, federal unemployment tax (FUTA), and state unemployment taxes.
Social security and medicare taxes
Employers are required to withhold Social Security and Medicare taxes from their employees’ wages and contribute an equivalent amount. The total Social Security tax rate is 12.4% of the employee’s wages, split equally between the employer and employee. The Medicare tax rate is 2.9%, also split equally.
Federal unemployment tax (FUTA)
Employers must pay FUTA tax to fund unemployment benefits for workers who lose their jobs. The FUTA tax rate is 6% on the first $7,000 of each employee’s wages. However, employers can receive a credit of up to 5.4% if they pay state unemployment taxes on time, effectively reducing the FUTA tax rate to 0.6%.
State unemployment taxes
Each state has its own unemployment tax rate and wage base. Employers need to register with their state’s unemployment agency to determine their specific tax rate and comply with filing and payment requirements.
Self-employment taxes
E-2 visa holders who are self-employed or operate a sole proprietorship must pay self-employment taxes, which cover Social Security and Medicare contributions. The self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare.
Deductions for self-employment taxes
Self-employed individuals can deduct the employer-equivalent portion of their self-employment tax (50%) when calculating their adjusted gross income on their federal tax return. This deduction helps reduce the overall tax burden for self-employed E-2 visa holders.
Business taxes
E-2 visa holders operating a business must comply with various federal, state, and local business tax requirements. These can include corporate income taxes, sales taxes, and excise taxes.
Corporate income taxes
If the E-2 visa holder’s business is structured as a corporation, it will be subject to corporate income taxes at the federal level and possibly at the state level. The federal corporate tax rate is a flat 21%.
Sales taxes
Businesses that sell goods or services may be required to collect sales taxes from customers and remit them to the appropriate state or local tax authority. The sales tax rate and rules vary by state and locality.
How can we assist you?
Since our founding in 2015, Visa Franchise has been dedicated to helping immigrants turn their dreams into reality. We have proudly supported over 1,200 families from more than 65 countries in establishing successful businesses in the United States. Our clients have not only launched businesses but have also been pivotal in creating over 2,500 American jobs. Many of these enterprises have achieved revenues exceeding $1 million.
In an industry where experience and trust are crucial, Visa Franchise stands out by working with over 100 clients annually. This level of experience significantly surpasses the industry standard, where many firms handle only a few E-2 visa cases each year. Our extensive involvement ensures we are equipped to address a wide range of client needs and scenarios.
Whether you are just beginning to explore your options or are ready to start your application, do not hesitate to reach out to us at patrick@visafranchise.com. Our expert team is prepared to manage all aspects of your transition.
Conclusion
Understanding the tax obligations for E-2 visa holders is essential for compliance and financial planning. E-2 visa holders must navigate federal, state, and local taxes, including income taxes, employment taxes, self-employment taxes, and various business taxes. By staying informed and seeking professional tax advice, E-2 visa holders can effectively manage their tax responsibilities and focus on growing their businesses in the United States.
