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Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
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Experience:  Nearly 30 years of varied tax industry exp. Tax Biz owner
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We recently added a russian software developer to our team.

Resolved Question:

We recently added a russian software developer to our team. This individual would be considered a non-resident alien. I'm trying to determine what we need to do tax wise to cover ourselves (e.g., do we request a w-8eci or a w-8bn, do we have an obligation to withhold income tax or is the income subject to a tax treaty, etc.)
Submitted: 1 year ago.
Category: Tax
Expert:  Tax.appeal.168 replied 1 year ago.
Welcome, THANK YOU for using Just Answer. My goal is to help make your life...a little...LESS taxing

Yes, the person will need to give your a Form W-8Ben. This is because foreign persons are normally subject to a U.S. tax rate withholding of 30% on certain types of income that they receive from U.S. sources. The Form W8-Ben establishes that the individual is not a U.S. person for tax purposes, and the form claims that the person is a beneficial owner of the owner.

Link to Form W8Ben/instructions:

http://www.irs.gov/pub/irs-pdf/fw8ben.pdf
http://www.irs.gov/pub/irs-pdf/iw8ben.pdf

There is a tax treaty between the U.S. and Russia, which means that there will be no double taxation for the foreign person. Article 22 of the treaty states the following;

In accordance with the provisions and subject to the limitations of the law of each Contracting State (as it may be amended from time to time without changing the general principle hereof), each State shall
allow to its residents (and, in the case of the United States, its citizens), as a credit against the tax on income, the income tax paid to the other Contracting State by such residents (and, in the case of the United States, also such citizens).

Link to full treaty:

http://www.irs.gov/pub/irs-trty/russia.pdf


------------------------------------

The business will need to complete Forms 1042 and 1042-S.

Link to Form 1042/instructions:

http://www.irs.gov/pub/irs-pdf/f1042.pdf
http://www.irs.gov/pub/irs-pdf/i1042.pdf

Link to Form 1042-S/instructions:

http://www.irs.gov/pub/irs-pdf/f1042s.pdf
http://www.irs.gov/pub/irs-pdf/i1042s.pdf

Please let me know if I can be of further assistance to you regarding this matter.

Thank you again for using JUST ANSWER.





Customer: replied 1 year ago.

Thanks for your quick response. So if I understand you correctly, we need to request that our Russian developer provide us with a Form W-8Ben, correct?


 


Secondly, with regards XXXXX XXXXX treaty, does this mean that the Russian developer won't be taxed on the income received by the IRS, but rather only by Russia? If so, I assume the burden lies on him to report this income to appropriate Russian taxing agency?


 


Lastly, you mention that the business will need to complete forms 1042 and 1042-s. When you say "the business" are you referring to our United States based business that has contracted with the Russian programmer or are you saying that the Russian programmer is responsible for filing out these forms? Also, what is the difference between the two forms?


 


Thanks again.

Expert:  Tax.appeal.168 replied 1 year ago.
Hello Again Erick,

You are welcome.

Q: So if I understand you correctly, we need to request that our Russian developer provide us with a Form W-8Ben, correct?

A: Yes, if you do not receive a form W8-Ben from the developer and it the form is not timely filed (refer to instructions), your company will be required withhold the 30% tax rate form the developer's income. Submitting the Form W8-Ben will exempt the developer from the 30% witholding based on the Treaty.

--------------------------------------------

Q: Secondly, with regards XXXXX XXXXX treaty, does this mean that the Russian developer won't be taxed on the income received by the IRS, but rather only by Russia? If so, I assume the burden lies on him to report this income to appropriate Russian taxing agency?

A: What this means is that any taxes that the developer pays in the U.S. will be credited back to him/her on their Russian tax return.

---------------------------------------------

Q: Lastly, you mention that the business will need to complete forms 1042 and 1042-s. When you say "the business" are you referring to our United States based business that has contracted with the Russian programmer or are you saying that the Russian programmer is responsible for filing out these forms? Also, what is the difference between the two forms?

A: Your business (the U.S. business). The Form 1042 is the Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and the Form 1042-S is Foreign Person’s U.S. Source Income Subject to Withholding. You are required to submit both of these forms to the IRS even if you do not have to withhold taxes. You can refer to instructions provided in the previous post for more detailed information regarding these forms.




Customer: replied 1 year ago.

Sorry, but I'm still a little confused. So the Treaty provides that the Russian developer is not subject to the 30% withholding so long as a Form W-8Ben has been timely filed, correct?


 


If so, then I don't understand what you mean by "What this means is that any taxes that the developer pays in the U.S. will be credited back to him/her on their Russian tax return."? How would he pay taxes on his income unless we were withholding it?

Expert:  Tax.appeal.168 replied 1 year ago.
Erick,

Sorry for the delayed response. I was just about done typing the reply and lost all the info. I hate when that happens.

A1) Sorry for the confusion. The treaty eliminates double taxation, the timely filed Form W8-Ben exempts the developer from the 30% withholding. It is correct, if the W8-Ben is filed timely the developer will be exempt from the 30% withholding.

A2) "What this means is that any taxes that the developer pays in the U.S. will be credited back to him/her on their Russian tax return."? What I mean by this statement is that IF the W8-Ben was not filed in a timely manner, and the developer was subject to the 30% withholding, this amount would be credited back to him/her on their Russian tax return, which they are responsible for dealing with.

------------------------------------------------

In order to claim the tax treaty benefits, the developer will need to complete a Form 1040-NR tax return.

Link to Form 1040-NR/instructions:

http://www.irs.gov/pub/irs-pdf/f1040nr.pdf
http://www.irs.gov/pub/irs-pdf/i1040nr.pdf

In order to file the 1040-NR, the developer will need to obtain an ITIN (Individual Taxpayer Identification Number). A Form W-7 needs to be completed.

Link to Form W-7/instructions:

http://www.irs.gov/pub/irs-pdf/fw7.pdf
http://www.irs.gov/instructions/iw7/index.html

Customer: replied 1 year ago.

Not a problem Angela. This is all great information. I found some information online, however, that appears to conflict with your answer and I'm assuming this person's advice was just inaccurate (thus the problem of relying on non-experts). It seems she is making a distinction that the work is being done outside the U.S. so none of the reporting you mentioned applies.


 


Her answer was a follows (if you could briefly comment on this, I would greatly appreciate it):


 




If I have an LLC here in the US and temporarily hire a programmer through Elance.com or Odesk.com, and that programmer lives and works in Nicaragua (or any foreign country), how do I handle withholding and taxes?

 







Best Answer - Chosen by Voters


You collect enough paperwork to prove you performed due diligence.

You need them sign a document showing their name, foreign address, under penalties of perjury and statement that they are NOT a US citizen or resident alien for US tax purposes AND that the work is being done in the foreign country.

The applicable IRS publication 515. The problem is, the publication only covers the situations where the income is taxable in the US. That happens if the individual is a US citizen or resident alien (forms W-9 and 1099-Misc) *or* if the work is done in the US (forms W-8BEN and 1042-S). Your situation is NEITHER of these, so no forms apply. (Unfortunately, the publication 515 doesn't actually spell that out.)

To get the language right for the contract, see the wording on form W-8BEN and add the NOTS. Save the contract with their invoice and proof of payment in order for you deduct what you pay them.

 



Expert:  Tax.appeal.168 replied 1 year ago.
Erick,

Her:

You collect enough paperwork to prove you performed due diligence.

You need them sign a document showing their name, foreign address, under penalties of perjury and statement that they are NOT a US citizen or resident alien for US tax purposes AND that the work is being done in the foreign country.

ME:

The due diligence would be having the person complete the correct W-8 form. In your situation is the Form W8-Ben.

-------------------------------------
HER:

The applicable IRS publication 515. The problem is, the publication only covers the situations where the income is taxable in the US.

ME:

If it were not for the treaty between Russia and the U.S., the income would be taxable in the U.S.

------------------------------------------

I'm not sure what else you want me to say about this matter, I've provided you with the tax obligations of the developer, the company, and the proper forms that need to be used. I cant compare the example you provided to your situation because it is not the same. I am not going to try to dissect or figure out why this person providing the information that she did in the language that she did. I can tell you that the information that I provided is from reliable sources, and is true and correct to the best of my knowledge.



Tax.appeal.168, Tax Accountant
Category: Tax
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Experience: Nearly 30 years of varied tax industry exp. Tax Biz owner
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