This post is provided by Veronica Rhodes from TFX

The internet has made the world a lot smaller, so much so that entrepreneurs and businesses can now hire independent contractors from foreign countries. Teams are no longer limited by geography: Today, you could have people from different countries remotely collaborating on a project at the same time.

However, hiring independent contractors comes with a few legal landmines. If you’re not careful, you could expose yourself to legal and financial liabilities, not to mention the tax implications of having workers that are based abroad.

Here are a few things you need to know when hiring a foreign independent contractor.

What is an independent contractor?

An independent contractor is an independent professional who offers their services to the general public. They also go by other names: self-employed, 1099 contractor, freelancer.

They are different from regular employees in that they are not bound by formal employer-employee relationship. According to the IRS definition, an individual is an independent contractor if the client has no control over the process and can only dictate the output.

How to hire an independent contractor?

There are three common ways to hire foreign talent:

  • Opening a foreign office
  • Hiring through an agency
  • Hiring directly

Opening a foreign office

Larger companies often open a subsidiary in a different country, which then hires people from the local pool of talent. Depending on the type of entity, it may require setting up new articles of incorporation, permits, bank accounts, and tax identification numbers. While this option allows you to hire large numbers of foreign workers, it will require a lot of time and resources.

Hiring through an agency

You can hire independent contractors through an agency that performs all the typical work of an HR department such as payroll, training, and tax reporting, on your behalf. The agency serves as the intermediary between you and the independent contractor.

Hiring directly

The easiest option for many businesses is to hire a foreign independent contractor directly. While you have to take care of payroll and other tax reporting yourself, you might find that you will save more money in the long run.

However, it’s important that you familiarize yourself with the different laws regarding cross-border employment to protect against potential legal or tax issues that may arise in the future.

How to determine if a person is an employee or an independent contractor?

Let’s say you hired an independent contractor to perform a service for your business. Remember that for a person to be classified as an independent contractor, the client must have no control over the process. That means you can dictate the output, but not what will be done or how it will be done. But what if you want things done a certain way or at specific times?

There is no single factor that determines a person’s work status, and the lines between employee and independent contractor are becoming increasingly blurred. The IRS uses a 20 Factor test, also known as the right-to-control test, to determine a person’s work status for tax purposes.

What form do independent contractors fill out?

It’s important to note that independent contractors are responsible for their own taxes. But that does not mean that you are absolved of responsibility. You may be required to report payments to independent contractors you have hired.

If you are based in the United States and you hired an independent contractor who is a U.S. citizen and lives in the United States, you need to abide by certain reporting requirements.

First, the contractor should give you their Form W-9, Request for Taxpayer Identification Number and Certification. You will then issue a Form 1099-NEC, Nonemployee Compensation, to report compensation to independent contractors higher than $600. You do not have to pay FICA taxes, payroll taxes, health insurance, and other taxes that are associated with the traditional employer-employee setup.

If you hired a foreign independent contractor who lives outside the country, you don’t need to withhold tax or report payments to the IRS unless the income is U.S.-sourced. You may need to use Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), as proof of your relationship with the contractor.

How to file taxes if I’ve hired an independent contractor?

Filing taxes for your business is already complicated enough without having to consider the legal ramifications of hiring an independent contractor. While hiring remote talent comes with many advantages, you may run into tax issues if you’re not careful. You might want to talk to a tax expert to prepare for potential challenges.

The tax experts at TFX can help you deal with any tax issues that may arise from international work relationships. Their team of experts can give you the information you need to minimize liability and ensure your tax returns are flawless.

TFX is a women-owned tax firm that offers all U.S. tax services — for both American citizens and non-citizens with U.S. tax filing requirements. From straightforward expat tax preparation to complex cases involving multiple factors — we’ve handled it all for over 25 years.