Tax for H1B,OPT,F1 Visa Holders Working as Independent Contractors

[Administrator]

Taxes for Visa Holders Who are Independent Contractors. By Atlanta Tax Guru

Most visa holders who come to the U.S. come either to work, to attend school or do conduct research. The other articles address which taxes apply to the various visas. This article addresses how to report income earned when the visa holder is being paid as an independent contractor.

Employer in the U.S. employ people either as employees (salary/wages reported on W-2) or as independent contractors (compensation reported on Form 1099-MISC). If you are an employee, the employer has more control over your work rules and hours worked. If he pays you as an independent contractor, he loses some control, BUT he pays virtually no employment taxes.

For employees, the employer must withhold income taxes for the IRS and for the state (in one of the 43 states that have an income tax). Some counties and cities, such as New York City, also have a local income tax. The employer is also responsible to pay a .5% unemployment tax (either to the state or to the federal government), workman’s compensation and the FICA taxes, which is Social Security (taxed at 12.4%) and Medicare taxes (taxed at 2.9%). The employer pays these taxes, but they can withhold one-half of the Social Security and Medicare taxes from the employee. In essence, the employer pays half the Social Security and Medicare taxes and the employee pays the other half.

For independent contractors, however, the employer has virtually NO financial responsibilities when it comes to taxes. The employer neither pays nor withholds ANY taxes or workman’s compensation. Needless to say, this provides great financial incentive for the employer to treat their employees as independent contractors. The IRS knows this and has a checklist to determine if personnel working for any employee are employees or independent contractors. We are not going to address that in this article, principally because visa holders, needing the good will of their employers for sponsorship purposes, have little leverage to challenge their status as independent contractors if that is how the employer chooses to employ them.

So we will assume that you are in fact being paid as an independent contractor. When you get your check, you will notice that NOTHING is being withheld for income taxes (federal, state or local) or for the Social Security and Medicare taxes. These taxes still have to be paid if you are liable for them (more on that later). In the first year, once you have determined which taxes are due, you will have to pay them when you file your tax return. That could be a SIGNIFICANT amount of money, so you need to put aside a certain percentage of each paycheck (at least one-third), preferably in a savings account at the bank, so that you will have the money when you it comes time to pay.

Let’s do a quick review of tax rates. As noted above, the Social Security tax rate for employees is 6.2% on the first $90,000 earned in 2006 ($97,000 for 2007). After the first $90K, Social Security taxes stop! For Medicare, the tax rate is 1.45% on every dollar you earn! For independent contractors, you pay exactly twice what the employee pays, because you are paying BOTH the employee’s AND the employer’s share of these taxes. Federal income tax rates start at 10% and top out at 35%. Most visa holders will pay between 15% and 25%. State income taxes can be as low as zero or as high as 15%. So it is possible you could be paying between 35-55% in taxes as an independent contractor.

All is not lost, however! You can greatly mitigate this odious tax burden by claiming a large number of deductions which are not available to you as an employee. Here is a partial list of deductions available to most independent contractors:

Cost of business cards.
Partial cost of your cell phone.
Partial cost of your personally-owned computer/laptop (if used for business).
Partial cost of your Internet Service provider (if used for business).
Professional fees (tax preparation, legal fees associated with your visa).
Office expenses (paper, ink cartridges, pens, pencils, etc. used for business).
Business use of your home/apartment.
Business use of your car/truck (discussed below).
You report your income and these deductions on Schedule C (Profit or Loss from Business).

The biggest potential deduction is Car Expenses, which is why we will address it separately. The use of your personal vehicle while on business is deductible, either on a pro-rated basis of all your expenses or on a flat mileage rate. The mileage rate for 2006 is 44.5 cents per mile; for 2007, it is 48.5 cents. Hence, for every 1,000 business miles you put on your car, you can claim a deduction of $445 in 2006. Unfortunately, the biggest use of your car will probably be driving to and from work (commuting), which does not count! Commuting expenses, no matter how far the commute, are never tax deductible. However, if you drive extensively in your business during the work day and you are not reimbursed for those expenses, they are fully deductible. Further, any non-reimbursed travel in your car is also deductible.

This article is designed only to give you an idea as to how many various deductions are available to you as independent contractors. To be sure you get all the available deductions, you should use a tax professional with experience preparing Schedule C.

I hope you have found this brief article informative. It is the one of many we will post to this forum to serve our guests. If you have any questions, lets discuss it in the forum.

[coolmac]

Hi,

I am an international student graduated in Oct 2009. I have been on my OPT from Nov 2009. I started working as an volunteer until Jan 10, 2010 in Atlanta. From Jan 11 to Mar 31, 2010 I have been working as an independent contractor in Florida for a consulting group in my area of study(Masters degree). I initially filled W-9 with them and there is no tax deduction from my payments.

Now I have an offer from another company for a full-time position and also filing for my visa this year. They are asking for pay stubs from my consulting company which I do not have.

I only receive invoices from the consulting firm. I read that an independent contractor should get payed on 1099 which I did not fill at any time with the consultant.

My questions are
1. Whether is it legal to work as an independent contractor or does it affect my H-1 visa filing? ( I already sent the independent contractor agreement to the international student office of my school and they just said they updated my profile, which I assumed was alright with my status)

2. How can I get my pay stubs from the consulting company? If not, What is the substitute for the pay stubs?

3. Being working from Jan 11-Mar 31 ( may extend for another month), when should I file the taxes as an independent contractor? ( I recently filed my federal 2009 taxes on W-2 form)

Please let me know. Thanks in advance.

[f11099misc]

are f1 visa holders on opt exempt from the 1099 employer tax?

As far as I can remember I was exempt from social security and medicare. I also had a 3000 taxtreaty exemption for being from the philippines. But this was when I got w2s

[Visa Taxes Expert]

In general F1 students are not supposed to collect 1099, if you have you are not exempt from FICA Taxes. You file Form 1040NR with Schedule C and Form 8843.

Contact us at taxexpert@visataxes.com for a quote on our tax preparation services.

[aquinas]

I came to the USA on January 8, 2005 with a F-1 visa. I have been a student until March 3, 2010. I have filed the 1040NR-EZ in the year 2008 becuase of my income in CPT. However, I filed 1040 for the tax year 2009.

I have no idea if my staying das in the USA can meet the "Substantial Presence Test"? Also, I do not understand how to define "five calendar year"? Am I still be treated as an "exempt individual as a the United States?

Enclosed please find my days present in the USA since 2005.
Day present in the US in 2009: 363
Day present in the US in 2008: 366
Day present in the US in 2007: 363
Day present in the US in 2006: 365
Day present in the US in 2005: 315

Can any one answer me this question? By the way, what shuold I do if the form 1040 I filed is wrong? I mean I should file 1040NR this year, not 1040! Will I have the penalty from IRS because of my carelessness?

[Administrator]

International Student Taxes - F1 Form 1040NR or Form 1040 Tax Filing

Since this is your fifth year in F1 , you are under exempt status, and hence you have to file Non Resident Form 1040NR not Form 1040.

If you file Form 1040, its a mistake, and you have to correct it by filing Form 1040X.

Contact us at taxexpert@visataxes.com for a quote on our tax preparation services.

Hope it helps!

[gnm_0201]

Hello,

I am working as an independent contractor for a foreign (non-US) company on my OPT. Does my contracting company have to send me 1099? If not, how should I report and file my taxes? Note: I have been in the US for 5+ years (so a resident alien for tax purpose).

[Atlanta Tax Guru]

Yes, if your worked in the U.S., they must originate a Form 1099-MISC for you to document your pay.

You will file Form 1040 with Schedule C and SE to record your expenses and calculate the self-employment tax, a tax for which you are liable because you have been in the U.S. in excess of 5 years.

[gnm_0201]

Thank you Atlanta Tax Guru, but since my contracting company is not based in the US, they are not required to send me 1099. Is there anyway I can help them understand the IRS obligations on my end? i.e. Is there any resource that can be used by non-US companies to understand the process?

Thanks.

[Atlanta Tax Guru]

The IRS usually maintains an liaison office at the local U.S. embassy. Have the company contact them.

Even if they do not originate the Form 1099, you STILL must report the income on Schedule C.