tax duty to foreign employees
I am a small consulting firm and hire contractors
overseas to do some of the work. These freelancers are not U.S.
citizens or residents and all services are performed in their home
countries. I've been reading Internal Revenue Service Publication
515 and need some clarification; do I need to withhold any taxes
or report anything like a 1099 to the government? How do I document
this? Invoice, statement of work, e-mails? What is the requirement?
You and other employers who have shipped jobs overseas luckily have
left a few of us here to answer your questions.
If you have been reading Publication 515, you're confused
because it mainly deals with withholding on payments to nonresident
aliens. To determine whether income is subject to U.S. tax, you
need to determine its source. Personal-services income is sourced
where the services are performed; in your case, a foreign country.
Since the services are performed in a foreign country
and are paid to a foreign person, there is no U.S. withholding.
Form W-8BEN is required from a foreign person who is subject to
U.S. withholding and therefore would not be applicable in this case.
Form 1042-S (similar to a 1099) is used to report U.S. source income
paid to a foreign person and again would not be applicable in this
Basically, there are no documents specifically required
where the payments are to foreigners. However, it's a good idea
to document everything to avoid questions later. I would certainly
get a copy of the foreign person's passport, and it would be a good
idea to get invoiced for the services, even if it is only in an
Also, how you make payment to the foreign individual
should be documented. If you're wiring to a foreign bank account,
that is pretty clear. But I've seen foreigners that maintain accounts
in the United States and use debit cards to withdraw their earnings.
If you're depositing in a foreign worker's account here, the IRS
would probably want to see proof that the person is not actually
in the United States. I'm not sure what kind of proof is good here,
because if you gave a copy of the passport, the IRS could always
claim that you didn't copy all the pages and an e-mail can be sent
from anywhere. It would obviously be nice to get a copy of his bank
statements showing the overseas withdrawals, but he or she may not
be comfortable with that.
Depending on how you pay the worker, you may need
to have some evidence to show the individual is indeed in a foreign
country. Otherwise look to hire an American.