Tax for foreign independent contractor

[u12292101]

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

[DanielV01]

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.

[u12292101]

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.

[u12292101]

@DaveF1006 thanks for the reply.

So basically I need to report all my income for the whole year. I have some further questions.

1. The employer is a US company but you said foreign client/employer, would that make any difference?

2. I heard about form W-8BEN. Is this the form I should set up with the employer now? Or any other form is needed?

Thank you again. 

[DaveF1006]

Yes, if you receive income from US sources, you are required to file a 1040NR return because you are subject to US income tax only on your US source income, just like residents. Please refer to this IRS link for further information.

Form W-8BEN is a form used  to collect correct Nonresident Alien (NRA) taxpayer information for individuals for reporting purposes and to document their status for tax reporting purpose. Please review further details about that certificate here, which includes a link to download a PDF version of the form.  Also here is a source for further information about reporting requirements for non-resident aliens.

[u12292101]

@DaveF1006 Thanks, you mentioned "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."

1. In that case shouldn't I file 1040 for 2022 instead of 1040NR?

2. Also for W-8BEN, this form is for nonresident alien only. Since I'll be resident alien eventually, should I still do W-8BEN first for the period from January to July of 2022?

Thanks

[DaveF1006]

Yes I read your questions and to answer this correctly, two assumptions need to be made.

1.  If you remain in your foreign country for the entire year, you will  be  considered a non-resident alien for 2022.
2. However if you are present in the United States at any time in 2022, then the Substantial Presence Test must be met to determine if you are a resident alien or not.

1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
   • All the days you were present in the current year, and
   • 1/3 of the days you were present in the first year before the current year, and
   • 1/6 of the days you were present in the second year before the current year.

Keep in mind, if you were an 'exempt" individual as a H1B Visa holder at any time you were in the United States, you will not include these days in the Substantial Presence Test thus considered a non-resident alien during the time you were exempt. if you did not file an exemption during your stay in the US, then you may include all your days you were present in the US prior to 2022. At this point, it is hard to tell what your status will be unless you have made pre-made plans for 2022. 

As far as the W8BEN, you are correct to state this is a form for non-residents only. If you don't meet the Substantial Presence Test for the entire year, then this needs to be filed. According to this IRS instructions regarding W-8BEN, "ou must give Form W-8BEN to the withholding agent or payer if you are a nonresident alien who is the beneficial owner of an amount subject to withholding, or if you are an account holder of an FFI documenting yourself as a nonresident alien". 

As you read these instructions, please take note of the section entitled Do not use Form W-8BEN if you are described below. In your case, look at the bullet point that says if you are a U.S. citizen (even if you reside outside the United States) or other U.S. person (including a resident alien individual). Instead, use Form W-9 to document your status as a U.S. person.

@u12292101

[u12292101]

@DaveF1006 thanks.

Since I have accumulated a lot of days in 2020 and 2021, most likely it will be more than 183 days in the Substantial Presence Test as long as I come back. Let's just assume I come back in August. In that case I would be considered resident alien for 2022, I shall file 1040 and report all my income including the part from the US employer for the period of January to July when I'm staying out of the US. Is it correct?

As for W8BEN, that's the confusing part I'm not sure with. Even though I expect to be resident alien for the later part of 2022, technically I'm still nonresident alien currently. Should I fill out W8BEN when I set up employment with the employer right now?

Thanks

[DaveF1006]

Yes, you will be considered a resident alien and file  a 1040 and report all your income including the part from the US employer for the period of January to July when you are out of the country.

As far as the W-8BEN, you may consider yourself a non resident alien for the time you spend overseas but you are still a resident alien for income tax purposes in 2022. In the IRS instructions, it clearly states not to use form W-8BEN if you are a U.S. citizen (even if you reside outside the United States) or other U.S. person (including a resident alien individual). Instead, use Form W-9 to document your status as a U.S. person. Based on this, I standby my advice 

[u12292101]

@DaveF1006 

Wouldn't it make more sense to fill out W-8BEN based on current situation instead of W-9 based on future assumption? There might still be chance that I don't go back to the US, then W-9 wouldn't stand. 

In my understanding, W-8BEN just allows the employer to not withhold payment made to me. Would it be an issue that I submit W-8BEN now, then change it to W-9 when I actually come back later 2022 and file the whole year 2022 as resident alien?

Thanks

[DaveF1006]

Yes, I agree with you. If you are uncertain about whether or not you you are going to return, then it is a safe bet for you to go ahead and fill out the W-8BEN. If the IRS questions the action, you can answer back and say that you filled it out because you are uncertain of your resident status in 2022 and you wanted to ensure that you complied with the Tax Law based on your uncertainty. 

@u12292101

[DaveF1006]

Yes, I agree with you. If you are uncertain about whether or not you you are going to return, then it is a safe bet for you to go ahead and fill out the W-8BEN. If the IRS questions the action, you can answer back and say that you filled it out because you are uncertain of your resident status in 2022 and you wanted to ensure that you complied with the Tax Law based on your uncertainty.

@u12292101

[u12292101]

@DaveF1006 thanks, I think it's a safer bet to fill out W-8BEN first. Would it be an issue that I change it to W-9 when I actually come back later 2022 and file the whole year 2022 as resident alien?

Besides W-8BEN, is there any other form either the employer or I should complete now?

Thanks again

[DaveF1006]

It depends because this is a question that has no clear precedence with the IRS in this specific case therefore I shall issue an opinion based on the uncertainty you are facing.

At this point, you are uncertain if you will be considered an alien or non-alien depending on whether or not you return to the US. In this case, I advised you to fill out a W-8BEN based on your uncertainty. 

In doing additional research, I uncovered a following nugget of truth in the W-8BEN instructions , which can be helpful to you.  

"If a change in circumstances makes any information on the Form W-8BEN you have submitted incorrect, you must notify the withholding agent, payer, or FFI with which you hold an account within 30 days of the change in circumstances and you must file a new Form W-8BEN or other appropriate form." The appropriate form is form W9 and the change in circumstances means that you are certain you will be classified as a US person for income tax purposes.

Based on this, there will be no problem to change from a W-8BEN to a W9. At this point, there is no other forms to fill out unless your employer changes your status from an independent contractor to an employee. If this is the case, you will fill out a W4 and not a W9.