Have a Tax Question? Ask a Tax Expert
Hi and welcome to Just Answer!1. They payment to the foreign contractor, is categorized as Cost of goods sold? Contract labor? others (specifying foreign contractors for example)?If the corporation sells goods - and the foreign contractor provides/produces these goods - the payment would be categorized as Cost of goods sold - and will be included into the cost for each item sold - otherwise - if there is no inventory - that would be contract labor.2. The 30% withholding tax for no tax treaty country, is categorized as a dividend, royalty or interest?Withholding is not a separate expense of the corporation. The corporation reports (and deducts) the total payment to the contractor - in your example - $5000 are expenses to be paid to a foreign contractor. 3. How can I pay myself those 1700? Only as a dividend? If I do that, again, withholding tax checking the tax treaty checking the publication right?Because C-corporation si a separate business entity - it pays to you in two ways - if you are an employee - you may receive wages, and as a shareholder - you receive dividends. Yes - there will be mandatory withholding fro any payments made to nonresident aliens.
4. What happens if to make things simple and avoid more forms, I made a single payment to the outside contractor for 7000 (minus withholding tax) and that's it? I am not clear which forms are you trying to avoid? Otherwise - you are correct - the actual payment will be $4900 and withheld amount $7000*30%=$2100 should be remitted to the IRS. The margin is going to be almost the same (due to the withholding, perhaps even less profit) but it's much simpler to arrange things outside US. Will this cause problems with the IRS?I assume the a foreign contractor will have a tax ID - and will be able to file US tax return as a nonresident alien - that way he/she will be able to recover some of withholding. All companies that are located outside US have to pay themselves as dividends or they can use a third party?The payment may be transferred to any party - but for tax purposes payments will be treated as paid to shareholders.
5. Do I have to get an ITIN to file the tax forms? or the EIN is enough for a C Corp?For purposes of C-corporation filing - EIN will identify the tax account for the corporation.For withholding - it would be better if C-corporation has ITIN for payees - that way - withholding that C-corporation will remit to the IRS would be properly credited to payees' accounts in the IRS system - in this case payees may file their individual tax returns and claim a refund. I believe I have to get one if I made a LLC company, but a C Corp doesn't need it.In case of the single member LLC - it is disregarded entity - and all transactions are treated as made by the owner - that is why the owner would need ITIN.ITIN is individual tax ID - it may be used only by physical persons. Corporations may not use ITINs for their own purposes - only EINs.
6. If I go through the dividends route, my name (or the person receiving the dividend in case I get a partner) has to be listed as a shareholders? or directors?Dividends are paid ONLY to shareholders out of corporation's income.Directors are employees and receive compensation for their services.7. Last question. I have to file form just form 1120 or also Schedule C 1040?For income tax return - for C-corporation - you will use form 1120. There might be additional forms and schedules. There is no schedule C based on information you provided. But you may need to file your personal tax return - if so - use form 1040NR - assuming you are a nonresident alien.
Regarding question 2:
Please post your question. Let me know if there are any issues with your chat.
Thanks for your reply! I do have follow up questions on 3 of my items.
Regarding number 2, I meant, when I make a payment to for example, a Canadian company (or an individual in canada) they need to submit their W8BEN to tell me they are indeed from Canada. I think in this case the withholding is 0%, but if I go to the IRS publication it list those 3 items (royalty, interest and dividends). My question is then, what item do I have to check in order to understand how much I need to withhold? Today it may be canada, tomorrow australia. Payment to foreign contractors for services provided outside the US are considered royalties? (not to file it like that in a tax return, but to know how to search it in the IRS/Google/Tax treaties).
In question 5. If the company makes 7000 gross and the payment for outside contractors is also for 7000 (minus withholding), generating no net income (as the payment to shareholders could be done by them outside the US). Is that allowed or will that raise a flag because the company isn't making profits ever? I'm doing numbers at the moment and the difference is minimal so is not about making extra profits (around 300usd or less which is nothing), but it would be faster for me. Is this a good idea or my tax return will like really suspicious? If not I will go the normal route separating everything. I don't want to have IRS issues but for me it seems like is more complicated with dividends, that's why I'm asking.
I have a bank/brokerage account in the US (receiving dividends, interests, etc) and I do not have to file a 1040NR, I only did a w8ben in the past. Are you saying that if I have now a corp in the US I have to start filing it even if I don't live there?
Payment to foreign contractors for services provided outside the US are considered royalties? (not to file it like that in a tax return, but to know how to search it in the IRS/Google/Tax treaties).Payments to contractors for services are NOT royalties, That is a compensation. In question 5. If the company makes 7000 gross and the payment for outside contractors is also for 7000 (minus withholding), generating no net income (as the payment to shareholders could be done by them outside the US). Is that allowed or will that raise a flag because the company isn't making profits ever?The answer is yes on both questions - that is allowed and that will be a red flag if the corporation will not make any income. Are you saying that if I have now a corp in the US I have to start filing it even if I don't live there?You might be required to file US tax return if you have an income from US sources. If you have no income from US sources - no need to file the tax return.
Awesome! I'm really happy with the provided service. I only have one question left on item 1 cause I'm not understanding. A payment to someone from canada is a compensation, not a royalty nor a dividend, understood. Then were do I need to check how much tax is for that country? Under what item?
As we already mentioned - payments to nonresident aliens are subject of US taxes ONLY if that is income from US sources.There are two types of income - effectively connected income and not effectively connected income.If you are engaged in a U.S. trade or business, all income, gain, or loss for the tax year that you get from sources within the United States (other than certain investment income) is treated as effectively connected income. Effectively connected income is taxed at same tax rates as for US residents - see the tax rate schedule on the last page of this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf Not effectively connected income is generally taxed at flat rate 30% unless the tax treaty provides reduced rate.
Royalties are generally related to natural resources (that is not a case) or to patents, copyrights, etc - that is not your case either.
See IRS publication 519 - page 12 - Table 2-1. Summary of Source Rules for Income of Nonresident Aliens - as we see Business income from Personal services is sourced Where services performed - thus is IT services are performed in a foreign country - the compensation received for these services is not income from US sources and is not taxable in the US.Therefore - such compensation is not subject of reporting on 1099MISC and is not subject of withholding. If that is a contract with an individual related to your business - you deduct such expenses as contract labor as you suggested.You are expected to keep a proof that (1) the individual is a nonresident alien and (2) services were performed in a foreign country.Generally - as a payer - you are classified as a withholding agent. You need to collect a signed form W8BEN - www.irs.gov/pub/irs-pdf/fw8ben.pdf
Thank you for the responses! I think I already approved the payment/verified the transaccion but the page closed, but seems like it was rated. I will be definitely coming back