Have a Tax Question? Ask a Tax Expert
Now I see a problem here.
First of all, by law, if your sub contractors authorized for SSN's then they are not entitled to ITIN's. As self employed persons, they must be authorized to work in the U.S. which means they need to have SSN's. There are circumstances where they would be able to recieve wages for personal service not related to a work visa and hence not able to get a SSN. However, in these circumstances, they woudl have legally entered the U.S.
The president signed into law today the new immigration bill, so the enforcement of checking for eligibility to work in the U.S. is going to be enforced at the small employer level. It has always been the law, but it was not enforced actively at the small employer level. Now it will be.
Immigration law requires you to verify that all your self employed and sub contractors are authorized to work in the U.S. This includes the employees of your contractors.
An ITIN does not authorize employment. It is used for those situations when someone who is not entitled to or authorized a SSN to have certain IRS related activities reported.
They simply complete the following form and submit it to the IRS along with the tax return.
The instructions on the W7 lists those circumstances when a person may request the ITIN without filing an income tax return.
1. I apologize, the latest bill he signed was merely an appropriations bill for for funding the homeland security modernization. The other bills are still in the Senate and the Congress. HOWEVER, the current law is explicit, that every employer is required to verify eligibility of employment of every employee using an I-9 Form. The reason that so many small employers do not, is that inspections are not done for employers who have 5 or less employees. As with any other issue, if it is not inspected for, it is not done.
However this can still get to be a problem.
It is always best to voluntarily comply.
FORM I-9: http://uscis.gov/graphics/formsfee/forms/files/i-9.pdf
Here is the issue:
1. U.S. Citizens and Permanent residents fall into a "protected class" with rights to employment under Title VII of the Civil Rights Act. However, once a non-protected person becomes employed, they now fall into a protected class under equal employment and immigration laws, FLSA, etc called "Employee".
2. Case law has shown that even illegal aliens whose rights as an employee have been violated, can find remedies in U.S.District and Federal Court. In addition, case law involving illegal and non-immigrant alien worker rights transform to precedence for U.S. workers and vice versa. The AFL-CIO and Teamsters has recognized this fact and have conducted campaigns to register illegal and non-immigrant workers as union members to boost membership, increase revenues, and strengthen the union domestically and internationally.
CASE IN POINT: An illegal aline worker who had gained employment at a hotel chain, had been verified by the I-9 process, and gained work. Later on, another employee reported the aline as being illegal, that his documents were fake. (employers are not experts at document inspection). The employer called the alien employee into the office to reshow documents. Upon closer scrutiny, the employer fires the alien. IN California District Court, the judge ruled in favor of the alien. The judgment for document discrimination was: (a) back wages with interest, (b) one year wages as punitive damages, (c) the employer had to offer the alien his job back should he gain legal entry to the U.S. at any time in the next five years.
So, although you are not supposed to employ them, as long as you have, they are entitled to the same rights and privileges of all other employees.
If you want to fix this, you can hire me or some other local person to come in to develop an on boarding process and system for new hires and contractors to be compliant with immigration and labor law. I estimate that this would be a 2 to 4 week project.
So where does this bring you with regard to TAXES:
Because they are hired and receiving remuneration, you are required to withhold taxes. They are required to pay taxes. You are treating them as independent contractors, however this may be incorrect. You need to look closely at the IRS rules for what constitutes an employee. However, lets assume you are right in this regard.
Lets get rid of this piece first: Non-immigrants (including illegal aliens) who have been in the U.S. less than 183 days are withheld at the 30% rate. Non-immigrants (including illegal aliens) who have been here l83 days or longer, are withheld as any other citizen.
Any person resident in the U.S. who is paid on a 1099 form, is required to provide the employer a W-9 form reporting their TIN (which can be a SSN, but may also be an ETIN or ITIN). They would indicate by checking the box, if they are subject to back up withholding. Back up withholding is 28%. (FEDERAL). This is in addition to collecting FUTA and state taxes, and SS/MC, etc.
You are required to take back up withholding of 28% for any of the following situations:
W9 Form: http://www.irs.gov/pub/irs-pdf/fw9.pdf
Now, in your current situation, the persons do not currently have an ITIN. This means you will have to take back up withholding of 28%.
When you send in the first withholding, you can include their application for an ITIN. This will establish the account. In the future, after the ITIN is established, you will be able to take withholding as you would with anyone else, provided you get them to complete the W9 form after receiving their ITIN numbers.
A final word about compliance with immigration law.
You can only fix this by requiring everyone in the company to provide documents. There is a way to do that, so that you are protected from document discrimination.
If an employee is not able to comply, within certain context provided by the compliance process, they will have to be terminated. They would get severance packages and guaranteed future employment should they require authorization to work in the U.S.
1. Both are right. You are not supposed to employ someone with out verifying their eligibility by using the I-9 process. Since you are not an expert at document forgeries, any reasonable attempt is considered compliant. Once hired, the employees are guaranteed all the protections and rights and benefits of any other employee under similar circumstances.
2. Taxes must be withheld and paid on all earned income to be compliant with IRS rules ,including for employees who are not eligible to work in the U.S.
3. You with hold at the back up withholding rate for employees who cannot show a W-9 indicating a valid TIN of 28%. (provided they have been in the U.S. 183 days or longer).