Offshore Contractors Hired by US Clients
Freelancing is among the global trends in businesses and the economy. Along with it are the issues related to taxes. Among these issues are the tax considerations when a US company makes payments to a non-US independent contractor, the need or the exemption of the company in terms of withholding taxes, the requirement for a tax return, and the need to issue Form 1099.
Non-US Person and Form 1099
Who is required to submit Form 1099? Only US persons are required to submit this form. There are conditions when an independent contractor may not be required to file 1099. First, all the services rendered by the contractor were done outside the United States. Second, the country has a tax treaty with the US. When the non-US person satisfies these conditions, he also may not be required to have withholding taxes.
For the record, the company must request a W-8 from the independent contractor. The W-8 would certify the foreign status of the offshore worker. The company has to keep this document in the event of being audited. Such record would supply adequate reasons for not issuing Form 1099 and not withholding tax. Individuals who can avail of this tax-exempt are those who provide “independent personal services.” Determining if the independent contractor falls under this category is the first step when considering tax exempt.
Form 1042 and Its Counterpart
Another form that is not required for offshore contractors is Form 1042. In place of these forms, the client should document the following information: who received the payment, reason for the payment, and the payment amount. With records like these, the company can avail of possible deductions. Having a personal audit like this type of document is essential not only for tax purposes but also for own accounting.
When a non-US position is Unsure
In the event of being unsure if the contractor is a non-US person, you can proceed with the deduction and the filing of Form 1042. This way, you can provide the required tax withholding requirement when it is needed. If otherwise, the contractor can file a United States tax return and claim for a tax refund.
The tax exemption through residence in non-US countries specifically applies to those living in countries with a US Tax Treaty. If the person is residing in a country without a tax treaty, the client has to take 30% tax withholding from the contractor’s payment and accomplish a form 1042-S. This form reports the received income and tax withheld. An example of these countries is Singapore.
