Should I report payments made to foreign independent contractors?
A US company is not obligated to withhold or report taxes if the contractor does all his work outside of the US
Foreign independent contractors earn income by providing personal services. According to the IRS, the source of personal services income is determined by where services are performed.
Therefore, even if a foreign person works for a US company, the income he or she receives is not US source income as long as the service is performed outside of the US. As a result, a US company is not obligated to withhold or report taxes if the contractor does all his work outside of the US.
As the foreign contractor will perform all the services in his country, he does not have US sourced income, and the US company does not have to report to the IRS payments made to the contractor.
If the company hires a Canadian contractor who lives in Brazil, it does not have to withhold or report taxes to the IRS. The contractor only needs to pay Brazilian tax on his income received from the company.
No need to withhold or report payments made.
Have foreign contractors complete IRS Form W-8BEN
The company is not liable for failing to meet tax requirements if the contractor has W-8BEN filled.
The equivalent form for overseas contractors is W-8BEN. Even though companies do not have to report foreign contractor payments to the IRS, they should have foreign contractors complete Form W-8BEN (for individuals) or W-8BEN-E (for entities).
These forms are used to establish status as a foreign person or entity. The paying company is entitled to rely on the claims made on these forms to determine tax reporting and withholding obligations.
The company can be subject to various federal and state penalties for not withholding tax before payment is made to a contractor. These penalties can have especially serious consequences, because you can be personally liable.
Therefore, make sure to get the W-8BEN completed by the foreign contractor. If the information on the form is different from facts, and the worker does not qualify as a foreign contractor, the company is not liable for failing to meet tax requirements.
Form W-8BEN and W-8BEN-E are valid from the date they are signed until the last day of the third calendar year, and should be updated beyond the three-year period.
An employer’s guide to avoid turning independent contractors into employees
the facts support the principal-contractor relationship, showing that a contractor is autonomous, without the principal controlling how and when the work is done
Even though the way a contract defines the work relationship is an important piece of evidence, most courts around the world look beyond the terms of the contract to determine the actual relationship.
Therefore, it is important that the facts support the principal-contractor relationship, showing that a contractor is autonomous, without the principal controlling how and when the work is done.
Each country has different criteria to make a determination, but here are some ideas to support a contractor status.
- Avoid an exclusive relationship. Allow a contractor to have multiple clients other than your company;
- DO NOT have a work schedule set by your company;
- DO NOT have a training system or supervision;
- DO NOT require reporting on tasks or metrics;
- Let contractors provide their own supplies and tools;
- DO NOT provide any employment type benefits (pension plan, insurance and vacation pay) outside of agreed payments;
- DO NOT provide reimbursement for incurred costs;
- DO NOT hire a contractor to perform a key aspect of your business* (Read below).
What we do to prevent any problems with our clients:
To ensure the best experience for our clients, Xequemate, a Brazilian development company with over 23 years of experience, upholds a strict work ethic. Throughout our tenure, we have not faced any legal complaints or lawsuits.
To safeguard our US clients, we take the following measures:
- We provide a contract that clearly defines our relationship as that of a contractor, not an employee.
We have completed the W-8BEN-E to protect our clients from any potential liability regarding tax requirements. - Our company is registered in Brazil, and all transfers are made to our account, making it impossible to establish an employer-employee relationship.
- We pay all due taxes in Brazil and provide our clients with a “Nota fiscal,” a government receipt that has a validation link with our IRS, making it impossible to counterfeit.
- Third-party services are regulated by a law in Brazil (Law nº 13.429/2017), allowing us to provide key aspects of our business as a third-party service.
- We operate with a foreign contract as it is more cost-effective than setting up an LLC in the US. With this setup, we pay a total of around 20% in taxes, including 0.38% taxes on foreign payments, and our clients are not required to withhold any taxes.
If we were to operate with an LLC, we would have to pay all US taxes, which is around 30%, in addition to 30% taxes on dividends for non-resident aliens. In Brazil, companies are not taxed for dividends.
For example, if we receive $10,000, we would get $7,962 under our current setup, while we would receive only $4,900 if we chose the LLC option, which is less than half the money.
Source:
https://jiahkimlaw.com/business/ultimate-guide-hiring-foreign-independent-contractor/
https://www.safeguardglobal.com/resources/blog/paying-foreign-contractors
https://www.deel.com/blog/all-you-need-to-know-when-hiring-independent-contractors
