As an Internet business lawyer, I can tell you most CPAs are just learning about this new-fangled thing called the Internet. Today, we have another post by the esteemed Dave Heistein, CPA, who represents a number of online businesses and is familiar with the issues you face from a tax perspective. The subject being covered today is guidance on tax-related issues when hiring overseas independent contractors. Thanks again, Dave!
Richard A. Chapo, Esq.
More and more businesses are hiring independent contractors who reside outside the U.S., and I often get questions about the tax withholding and reporting obligations in these situations. To help you navigate through these waters, I’ve outlined the key tax related issues you’ll need to address when hiring an independent contractor from outside the U.S.
As you are probably aware, if you hire an independent contractor in the U.S. you are required to report payments (if over $600 annually) on Form 1099-MISC.
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Conversely, when you hire an overseas independent contractor you typically will not have any tax withholding or reporting obligations. However, there are several conditions that must be met in order to be excused from withholding and reporting obligations when hiring overseas independent contractors. The questions you’ll want to answer are;
- Does the worker meet the requirements of independent contractor status?
- In what country does the worker maintain residence?
- In what country will the services be performed?
The first and potentially most complex step is to ensure that you have properly classified the worker as an independent contractor. The IRS has a list of 20 questions to consider. A key factor in determining if the person you hire is an independent contractor relates to the amount of control you have over the worker. If you have the right to control or direct only the result of the work and not what will be done and how it will be done, then the person is generally considered an independent contractor. For more information on the requirements for classifying a worker as an independent contractor, view my earlier post on that subject here.
As a side note, a small but growing number of countries have begun to enact laws to protect independent contractors. If you are thinking of hiring overseas independent contractors, especially if they will be providing substantial services for your business, you can avoid any unpleasant surprises by carefully checking the in-country laws before making the hire. For example, in Spain, an independent contractor who spends 75% or more of their full-time effort working for a single client may be classified as “economically dependent autonomous workers” who must be provided benefits such as paid time off and severance pay.
Next, assuming your overseas worker is correctly classified as an independent contractor, you’ll want to verify the worker’s country of residence to make sure he/she is not a U.S. resident. The best way to obtain proof that no US reporting is required is to have the independent contractor complete and sign the W-8BEN form. The tax withholding and year-end reporting requirements are often tied to the residence status of you, the payer, versus that of the independent contractor. In general, if you are not a resident of a country and have no permanent establishment in the country in which the independent contractor is a resident, then there is not a requirement to withhold taxes on the payments or file employment tax reports. Stated another way, if you hire an independent contractor in India and your business is solely located within the U.S., in most cases you will not be required to withhold any taxes or report payments made.
Finally, you need to consider where the services are performed. In most cases, the overseas independent contractor will be performing the work in his country of residence. Compensation paid to a nonresident alien (other than a resident of Puerto Rico) for services performed outside the United States is not considered wages and is not subject to withholding. However, if the nonresident alien comes to the U.S. to work for part of the time, the results can be different. For additional information, see the IRS Publication 515 or contact IRS International Assistance 1-267-941-1000.
The points above are from the U.S. IRS point of view. You’ll also want to check requirements in the countries you plan to hire from as a few have established local 1099 equivalent requirements.
As a closing note, regardless of the situation, remember that it is always good practice to keep detailed records of payments to contractors.
Dave Heistein, CPA
Dave Heistein is a Certified Public Accountant in the State of California, a QuickBooks Pro Advisor and managing partner of ProfitwiseAccounting.com. The Profitwise team includes experienced and knowledgeable bookkeepers, accountants, and business consultants familiar with the tax issues faced by online businesses and the steps necessary to minimize the tax online businesses such as bloggers, e-commerce sites, and affiliates face.
If you have any questions about income tax reporting obligations for overseas independent contractors, feel free to give Dave a call (619-819-0252).