The currency and method of payment must be specified in the contractor`s agreement. While using your bank can be the most convenient option, transaction costs can be expensive. It may be helpful to look for companies that specialize in offering low-cost currency exchanges at a good price. Some examples are Transferwise, PayPal, World First, and OFX. While an employee typically expects to have work in progress, independent contractors are hired for a specific task. While U.S. companies that hire foreign independent contractors have no tax reporting or withholding tax obligations to the IRS, they may have tax obligations to the countries where the entrepreneurs live and work. If a U.S.-based company hires U.S.-based contractors who earn more than $600 in a year, they must file Form 1099-NEC (Compensation of Non-Employees) with the IRS. Starting with the 2020 tax year, businesses that work with contractors will use Form 1099-NEC to file payments to contractors instead of the Form 1099-MISC used in previous years. For the 2020 taxation year, what was previously Box 7 of Form 1099-MISC will be deleted, as Box 1 of Form 1099-NEC and Box 7 of Form 1099-MISC will be deleted. Form 1099-NEC was last used in 1982 and is now brought back to life by the IRS.
On this form, employers report all payments made during the year to each contractor who received more than $600. Form 1099-NEC must be filed with the IRS by January 31 for the previous year. After all, as a small business owner, you hope to hire the right person for the job. In a local environment, even near an office space, you are more likely to be able to observe and direct the work done. But with foreign entrepreneurs, there is much less control over the quality of work. International entrepreneurs are self-sufficient and you cannot impose the same restrictions or schedules on their work as with a local employee or contractor. On the other hand, this autonomy can save valuable time for small business owners, as an international expert does not need the same level of oversight as an internal employee. This is one of the oldest and most commonly used methods to pay foreign entrepreneurs. A global money transfer network, SWIFT, is used to connect financial institutions around the world, and companies pay their subcontractors via international bank transfer. This is one of the most common problems when hiring international entrepreneurs, locally or internationally. There are certain criteria defined by the IRS that must be met for a person to be considered for the classification of employees and independent contractors. While this is the easiest to hire, it can lead to tax evasion fees and IRS audits if local laws and various configurations for entrepreneurs are not well understood.
We will talk about all aspects individually in the following sections. Using foreign contractors through a managed services company is another option. Instead of contracting directly with the person, you will enter into a contract with the service company that will deal with all labour law issues at its end. The equivalent of Form W-9 for foreign contractors is IRS Form W-8BEN. It has two variants: W-8BEN for individuals and W-8BEN-E for companies (foreign companies). The status of the entrepreneur determines the form to be collected. A U.S. person or company paying a non-U.S. citizen should verify whether the payment is U.S. source income and report the amount to the IRS using Forms 1042 and 1042-S, U.S.
Source Income of Foreign Persons Subject to Withholding. Independent contractors are generally responsible for covering their taxes, and hiring companies are exempt from this liability. However, depending on the country of the entrepreneur, the company may be involved in the process of compiling and reporting remuneration. Just because a person is considered an entrepreneur in one country does not mean they are an entrepreneur in another country. Each country has its laws to determine this, and they often differ. The corresponding form for foreign entrepreneurs is W-8BEN. Although businesses are not required to report foreign contractor payments to the IRS, foreign entrepreneurs should have completed Form W-8BEN (for individuals) or W-8BEN-E (for businesses). In the case of foreign independent contractors, the likelihood of a review by the U.S. government could be lower because a company does not have to issue 1099 to foreign independent contractors and no tax is payable by foreign entrepreneurs. However, companies should know that they are now dealing with foreign labor and tax laws.
Companies that hire foreign entrepreneurs may have difficulty controlling the quality of work due to language differences and lack of personal communication. The company`s attempt to cut costs by hiring foreign independent contractors has led to a costly legal nightmare. .