It’s increasingly common for U.S. companies to do some portion of their business overseas. For those businesses, reporting on foreign transactions for tax purposes can become complicated. Why?
The work performed by foreign independent contractors doesn’t occur in the U.S. As such, it’s treated differently than a contractor assignment in the U.S. In the eyes of the IRS, where the work is performed dictates the source of income for tax purposes.
Also, the IRS requires significant disclosure whether you’ve got an office overseas or are simply paying foreign independent contractors for their services.
Below we’ve outlined several steps to begin managing your tax reporting responsibilities.
Tax Consideration #1: Distinguish between employee and contractor
Be sure to understand the difference between employing someone overseas and working with them as an independent contractor.
Having an employee overseas is much more involved than engaging an independent contractor.
Tax Consideration #2: Withholding taxes
U.S. companies should not withhold taxes from money paid to independent contractors working overseas.
The contractor is responsible for reporting their income and following the tax laws of their country.
Tax Consideration #3: Tax forms
The IRS requires U.S. businesses to document any money they pay to foreign independent contractors. Forms to be aware of include:
- Form W-8BEN. Use this form to document foreign individuals you contract with over the course of the tax year.
- Form W-8BEN-E. Use this form when contracting with a foreign company or a self-employed worker operating as a business entity.
The contractors themselves will need to complete and submit these forms to you. Without these forms, you may be required to withhold income tax from payment.
Let our team help navigate the many tax compliance considerations involved with doing business overseas.
At PBMares, we help clients — including those in construction, government contracting, hospitality, and more — manage these complex issues. Let us help you manage your evolving business as you encounter new international tax rules and regulations.
Contact us to learn more today.