Have a Tax Question? Ask a Tax Expert
Because you are a US citizen and because the business was performed in California - you should follow US and California tax laws.
If people were your employees - as you mentioned above - you should pay employment taxes and issue forms W-2 - http://www.irs.gov/pub/irs-pdf/fw2.pdf.
If - however they are self-employed contractors - you should issue forms 1099-misc - http://www.irs.gov/pub/irs-pdf/f1099msc.pdf
You are required to issue the form 1099-misc to any person you paid more than $600 during the year.
Turbotax would not handle issuing these forms - you need to use accounting software - for instance - QuickBooks - http://quickbooks.intuit.com/
or fill forms manually.
Let me know if you need any help.
I am aware of the obligations generally.
The tricky part is that as the responsible party billing for services performed outside the US, the california company issued me the 1099 -MISC for all monies received in 2008. No taxes were withheld because the work was performed overseas.
I now want to write off expenses incurred in connection with my performance of those services, including wages to local (foreign) employess and independent contractors.
I can issue these folks a 1099 or a W2 but they are just going to throw it away. Does IRS seriously expect them to file US income taxes? Can I be personally liable if they do so?
It is now late 2009 and I haven't issued any W2s or 1099s. Is this bad?
As a technical matter, can I issue a W2 to someone who is not a US citizen and does not have a SS#?
When you file W2 forms for your employees - the IRS expects you - as an employer
- pay employer's portion of FICA tax
- pay FUTA and SUTA tax
- withhold and remit employee's portion of FICA tax
- withhold and remit federal and CA income tax
and yes - both IRS and CA FTB will hold you responsible for these money.
You are not required to withhold any taxes from 1099-misc form unless a payee is not an US person and is not a subject of backup withholding.
You may not be help responsible if any payee will not file tax returns - but you will need to keep a proof that all required reporting forms were issued - otherwise - your deduction might be disallowed..
Also - you need to use SSN numbers on any of reporting forms.
You may issue w2 form to a foreign person who do not have SSN - but such payment is a subject of 30% mandatory income tax withholding. Also - if you employ a foreign person in California - there might be issues with work eligibility.
Both the IRS and CA FTB will try to collect any tax liability.
While generally - there is ten years statute of limitation on federal tax collection - there is no such statute limitation on collection in California.
Thanks for answer but I don't think it's right. I know for a fact that my CALI client cannot withhold taxes for me because the work is performed overseas despiet fact that I am a US citizen. How then can it require me as a foreign employer to withhold US taxes for my employees who are not even US citizens? NOw, as far as FICA and such, there is not even a requirement that I contribute to such a system upon proof that I am covered and paying into a Greek pension system (which I am). Same as my Greek employees and contractors. So, as far as witholding of FICA for folks working overseas, for me (a foreign employer) not sure what you are suggesting makes sense.
The issuance of W2s by a foreign employer (which is what I am) to a local in a foreign country seems also not logically right.
I can see the IRS requiring me to show proof (if audited) that the expenses I claim as wages are in fact legit, but beyond that I am not convinced. Can you point to a publication that addresses the issue.
Please comment if you think I am making sense. Thank you.
I know for a fact that my CALI client cannot withhold taxes for me because the work is performed overseas despite fact that I am a US citizen.
Because you are not an employee - but a self-employed contractor - and has a valid SSN - and are US citizen - your client is not required to withhold income tax, but they may do that for your convenience - if they do that for you - the withholding amount would be reported in the box 4 - http://www.irs.gov/pub/irs-pdf/f1099msc.pdf
How then can it require me as a foreign employer to withhold US taxes for my employees who are not even US citizens? NOw, as far as FICA and such, there is not even a requirement that I contribute to such a system upon proof that I am covered and paying into a Greek pension system (which I am). Same as my Greek employees and contractors. So, as far as withholding of FICA for folks working overseas, for me (a foreign employer) not sure what you are suggesting makes sense.
If your business is registered and located in Greek - and all services are performed in Greek - all payments are e made in Greek - etc - so your business activities are under the Greek jurisdiction - all payments and reporting should be according to the local - not US tax law.
But in this case all payments to your employees or contractors are provided by the Greek legal entity in Greek - and not by your personally from the US.
If that assumptions are correct - you are correct - there would not be any IRS or FTB reporting requirements.
However - if payment is made by the US person or by the US legal entity - we are back to what I wrote above.
We also need to check it the tax treaty between the US and Greek have any regulations this matter - but there still will be reporting requirements.
The main publication which covers tax issues for Aliens is 519 - http://www.irs.gov/pub/irs-pdf/p519.pdf
Let me know if that helps
Thanks for clarification though still confused.
I am a licensed Greek attorney. In that regard, I am a Greek (foreign) business entity (though not a corporation) and recognized as such by Greek government where I permanently reside. Payments to contractors and employees are business expenses.
Hence, does my status as sole proprietor of a registered Greek business entity (sole practitioner of a legal practice) get treated as a foreign corporation in which case no requirement to issue W2s or 1099s (even if as to payments for services rendered by US citizens), or as that of a sole proprietor same as if I were residing in the US?
Thank you in advance.
That are so-called "servant of two masters" complications...
If you have a separate legal business entity in Greek - that do not perform any activity in the US - that would be OK,
But in your situation - you are a physical person - and in my understanding - not a separate business entity - and you are as US citizen - so the IRS would view you as US person.
The payment you received from CA client - and for the IRS it doesn't matter how and where you perform your work.
As an US citizen you are required to report all your income worldwide and because that income is reported on the 1099-misc form - the IRS will generally expect you to pay self-employment tax on the net income.
As long as you are acting as a physical person and not as a foreign corporation - the IRS will treat you as such regardless of your legal status in Greek or anywhere else.
Now - you need to support your deductions to reduce your taxable income.
You perfectly may have your business expenses in a foreign country. If you pay a foreign person for the work provided in the foreign country from the foreign funds - such payments do not need to be reported to the IRS.
However - the IRS might want to know that (1) all your deductible expenses are legit and (2) you do not violate any local tax law.