The 'needs to be formatted' is normal under windows. Actually after you install kali onto any disk, it will convert the drive partitions to its own format (ext4?) (Not sure about the persistence partition) However even if it stayed fat32 when you plug in your usb, windows will not see it because of the kali partition.
Now for a work around you can find some third party windows software to install that will "recognize a linux partition". You may have to mount the drive first in windows using said software.
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