Should an employee with an F-1 visa who also qualifies as "substantial presence" have federal and state tax withheld from their pay?

Yes, the F-1 employees can be liable for federal and state taxes from their pay, freelance.

Generally, individuals on F-1 visas are considered non-resident aliens for tax purposes for the first five calendar years they are present in the U.S. Since, they meet the substantial presence test, they can be considered resident aliens for tax purposes which means they’re treated much like a U.S. citizen. In that case, federal and state income taxes, along with Social Security and Medicare, would often need to be withheld.

In this matter, it's advisable to consult a tax professional to ensure accurate tax applications for your employees. You can refer to Publication 519 (U.S. Tax Guide for Aliens) for additional guidance: Publication 519 (U.S. Tax Guide for Aliens).

Once you're clear on the tax obligations, you can adjust the withholding as follows:

1. Go to Payroll, then Employees.
2. Choose your employee.
3. Select Edit under Tax withholding.
4. Choose the appropriate Federal W-4 form.
5. In the Federal Withholding Filing Status ▼ dropdown, select Exempt (if applicable).
   
6. In the State Withholding Filing Status ▼ dropdown, select Exempt (if applicable). 
7. Click  Save.
   

For more details about the process, open this link: Exempt your employee from Federal or State Withholding.

I’m adding these guides so you’ll get familiar with operating payroll taxes and how you can run, print, and customize reports to view useful information about your business and employees:

• Pay and file payroll taxes and forms electronically in the payroll
• Run payroll reports

Reach back out if you have more tax-related questions or concerns. I’ll be here anytime to help.