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Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.
Do you expect to direct the actions of the individual? If you expect to direct and control when and how the work she is completing is done, then she is an employee. You would simply continue paying her as you do now. You would be responsible for 1/2 of her payroll taxes, just as you are now and you would be responsible to withhold tax from her payment. Your payments to her and the payments of the taxes you are responsible for would be fully deductible.
If you are giving her the control of when and how the work is done, then she is an independent contractor. Under this arrangement there's no taxes that you are responsible for, and you do not have to withhold tax from her payment.
Her fee would be fully deductible to you
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Sorry, but this doesn't really answer my question. According to my research, we would be required to pay corporate taxes to Israel is she continues as an employee. Even is she becomes a 1099 contractor, we may be required to pay up to 25% of the taxes.
More details on classifying a worker as an independent contractor or employee can be found, here http://www.irs.gov/taxtopics/tc762.html
I can only speak to the US tax liability that you may have for the worker.
But, typically if you do not do business in another country you will not have a tax obligation to them
Thank you, XXXXX XXXXX question required an answer from an expert who would be able to let me know all tax implications of this situation.
I will open this up for other experts, I do not know of anyone who is an expert in Israeli tax, but if there is someone out there, they will respond.
Thank you, XXXXX XXXXX it.
NO problem. Please do not respond, as it sends the question back to me, since I was the last expert to assist, and lengthens your wait time.