As remote work increases in popularity, businesses are looking to outsource or hire international contractors for various positions. However, hiring international workers can create legal trouble if certain rules are not followed. Below are crucial details you should be aware of before you hire international contractors.
In most countries, simply defining a worker as a contractor in their written contract is not sufficient. Instead, many countries, including the US, look at the working relationship to determine whether they are an employee or a contractor. Each country has different standards for testing this, however, they are relatively similar. The end goal of the standards is to see how much control the business has over the worker, to determine if they are a contractor or an employee.
In most countries, a contractor working full-time hours for a single business is actually an employee for tax purposes. However, if the contractor is allowed other clients, whether they pursue this or not, they are deemed a contractor. In essence, the business should not have control over where the contractor works, what hours they work, or who else they work for. If a business controls these details, the contractor is viewed as an employee, even with a written contractor agreement.
When you hire international contractors, you must ensure that you meet the requirements in the US and the contractors’ country.
When your business hires a contractor within the US, you must report payments over $600 using form 1099-MISC. Your business must file these for each contractor, reporting the sum of all payments during the tax year.
For international contractors, businesses may not need to file any tax forms for the contractor. This is because if a foreign person performs work from another country for a US company is it not classed as US sourced income. For more information on source income, visit the IRS website.
Here are a few examples of employer and contractor situations and what tax actions are needed.
As the contractor will perform all work in their home country, payment is not US sourced income. As such, the US business does not need to report the payments to the IRS.
US work permit status does not determine whether a contractor pays tax or not. Instead, taxation is based on where they perform the work. Generally, as the contractor is living and performing the work in the US, the business must withhold tax at 30% before payment is made to the contractor. However, there are exceptions to this if the country they are a resident of has a tax treaty with the US. This includes both Canada and Mexico. For these countries, the contractor must file Form 8233 to the business to claim the exemption. Businesses must also file forms 1042, 1042-S, and 1042-T each tax year they have an international contractor within the US.
In this case, the business does not need to without any tax before payments. However, the business must issue Form 1099 and 1096 as they would to any US resident contractors working within the US. The contractor themselves is responsible for paying any taxes and filing with the IRS each year.
When you hire international contractors, one of the biggest benefits can be financial. It is often less expensive to hire a contractor over employees, especially as you are not responsible for their office equipment. Businesses can also save money by hiring from foreign countries with better exchange rates and lower labor costs. Finally, businesses with international contractors often see increased productivity as contractors are skilled and hired on a project-by-project basis.
However, some of the risks include increased government scrutiny, and a higher chance of tax audits as the IRS understands that businesses use contractors to save money. As a business owner, you will also have less control over how work is done and a lack of consistency if you switch contractors regularly.
Keep the above details in mind when you hire international contractors for your business. Ensure that you follow all legal requirements in both your business’ country and the country of your contractor. Failure to do so can be costly.
