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Jessica Legan, CPA
Jessica Legan, CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 0
Experience:  Indiana-based certified public accountant with 10 years of tax and accounting experience.
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licensed CPA or Tax Attorney familiar with foreign workers

Customer Question

This question is for a licensed CPA or Tax Attorney who is familiar with small S Corporations and/or LLCs who hire people from India for work and pay them.

I have a client who has an LLC (state is Indiana , if that matters) and has her computer team ("web developers") working from Pakistan.

She sends them money via Western Union. The IRS (in her audit) stated they were not "employees" and she could not write off payments to them.

I want to know

1.) what can she do to make sure (what RULE or CODE of IRS LAW) that states she can in fact write these employees off, or how she should pay them (other than Company checks) via Western Union to argue for this writeoff. I know their has to be a way, considering Google and all those companies outsource.

2.) Does she need to file anything with the state or pay "the employees taxes" to do this? Since they are not and never will be US citizens, what is the procedure?

Submitted: 5 years ago.
Category: Tax
Customer: replied 5 years ago.
Relist: No answer yet.
Expert:  Jessica Legan, CPA replied 5 years ago.
Your client needs to make sure that these workers are treated as Contract Labor, as opposed to "employees." Calling them employees indicates that she controls their schedule, how they perform their work and possibly pays them benefits. If she does not do any of these things, they should likely be classified as "Independent Contractors" in which case she would not be required to pay employment taxes on their services. In addition, she would not take this expense as a "Salary and Wage" deduction on her tax return, but as a "Contract Labor" deduction.
To specifically answer your questions:
1) Please review this article to determine the proper classification of this labor expense.,,id=99921,00.html
From your description, it sounds as though they should be classified as Independent Contractors.
2) By classifying her team as Independent Contractors, she will not be required to pay employment taxes.
Customer: replied 5 years ago.
Hi Jessica,

but if they are independant contractors isnt she required to 1099 them? They are not US Citizens (they are in Pakistan) so they cannot be 1099ed?