Question

Tax for foreign independent contractor

Forum|Forum|4 years ago
December 29, 2021
1 reply
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I have been working for a US company under H1B visa for a few years. In mid 2021 I stopped working and moved back to my home country. Starting 2022, my employer wants to hire me as a foreign independent contractor then bring me back to the US with H1B later in 2022. Based on Substantial Presence Test, I will be nonresident alien during the time staying in my home country then become resident alien again after I go back to the US.

Do I need to report the income for the period of I'm staying overseas and working as a foreign independent contractor when filing 2022 return? Is there any arrangement regarding tax my employer or I should set up now? Do I need to ask for any document? Thanks

Not A Product Question

DanielV01

Employee

Don't assume you won't be a US resident for tax purpose in 2022, because substantial presence is a tricky formula. It does not require that you are physically present in the US for 183 days specifically in 2022. Rather, it uses a lookback to determine if you have 183 days of total presence in the US based on the presence test formula.

That formula states that you meet the substantial presence test if you:

Have unexempt physical presence at least for 31 days in the current tax year
Have at least 183 "substantially present days" over the past three years using the following formula:
- 100% of unexempt physical presence in current year+1/3 of physical presence in prior year+1/6 of physical presence the year before that must be equal to or greater than 183. If so, you meet the substantial presence test to be treated as a resident for US tax purposes.

You state that you left the US in 2021 but did not say exactly when. For comparison purposes only, I am going to use September 3 as the day you left the US so that you have 245 days of physical presence in 2021 and 120 days not present/exempt. Also for comparison sake, we are stating you were here for all of the 366 days of 2020. 2019, while technically part of the formula for 2021, is moot.

You are a resident in this scenario for 2021 because you were "substantially present" for 245 days in 2021. You also were physically present for 122 days in 2020 using the formula, well above the 183 day substantial presence test.

What about 2022? It will depend on when you return back to the United States. For argument's sake, let's say that you return to the US on August 1 with an H1B visa (there's dual significance to that date for the second half of your question). In this case, you are physically present in the United States for 153 days in 2022, but you will also count 1/3 of your presence in 2021 (245/3=82 days) and 1/6 of your presence in 2020 (366/3=62 days). You would pass the substantial presence test for 2022 with 153+82+62=317 days. In fact, if these same facts hold, you could return to the United States some time in November and still meet the substantial presence test. (82+62=144, only 39 days more needed to fulfill the substantial presence test in 2022).

So let's say that you end up meeting the substantial presence test in 2022. This would require you to file as a US resident, meaning that you will report all of your worldwide income. What about the income you earned outside of the US during this time? It may qualify for the foreign income exclusion. This IRS website provides additional information: Foreign Earned Income Exclusion | Internal Revenue Service. If you are away from the United States for at least 330 out of 365 days (which do not need to be in the same calendar year) then you may exclude up to $108,700 from Federal income tax in 2021 and $112,000 for 2022. (However, as a contract worker, you are still responsible for self-employment income on the excluded amounts). In the same scenario above, you would meet the Exclusion test, being away from the United States for 332 of 365 days between September 3, 2021 and September 2, 2022.

If you don't meet the Foreign Income Exclusion test, but the income is taxed in your home country, you may claim a Foreign Income Tax Credit in order to reduce the taxability of the income in the United States.

A lot of "if's" and scenarios here. If your circumstances suggest that you will not meet the substantial presence test in 2022, please comment, because there would be other options in those cases.

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U

u12292101Author

Thanks for the long reply. I understand the concept of substantial presence test. I left US in mid-September 2021 and 'll file 2021 return as resident alien for sure. And for 2022, let's assume I will be back in August then I'll be resident alien for 2022 when I file 2022 return.

1. Am I considered nonresident alien before I come back? From January to July, I'll only have 1/3 of 2021 days + 1/6 of 2020 days, which would be around 140.

2. When I file 2022 return, do I need to report my income from January to July?

3. For the period of January to July, should my employer withhold my tax? As far as I know, for nonresident alien working as foreign independent contractor, the employer doesn't need to withhold tax or issue any document (W2 or 1099). But for resident alien, the employer should withhold federal income tax for services performed outside of the United States.

Thanks again.

DaveF1006

No. If you qualify as a resident alien for 2022 under the Substantial Presence Test, you are not considered a non-resident alien for income tax purposes for the period you resided outside the United States.

As DanielV101 stated above, you will need to report your world wide income because you are a resident alien for income tax purposes. This means you will need to report your income from January to July from your foreign client.

Your foreign employer is not obligated to withhold tax or issue a tax document. However, they should issue a statement of your earnings that were earned while you are outside the country in order to provide documented proof of your income. Keep in mind, as DanielV101 mentions, you may qualify for a foreign income exclusion or a foreign tax credit on the income you earned between January and July of 2022.

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