Hi and welcome to Just Answer!
Different expert here...
There are several issues to cover in your situation. Let do one-by-one.
As previous expert already noted - you may not simply classify a worker as an employee or as a contractor - incorrect classification may result in severe tax liability and penalty.
The issue is - who is in control what should be done and how that should be done. If your company is in control - the worker is your employee, however if the worker is in control - she is a self-employed contractor.
are very complex and there are lots of gray areas - that determination is very important and that would you first step.
If the worker is your employee - the second issue is the location of her workplace. If you simply allow the employee to work remotely for convenience of the employee - that doesn't change the workplace. The workplace still would be considered in the US - and in New Jersey - for income
tax purposes (federal
) and for unemployment tax purposes. So your employee will be responsible for NJ state income tax as well.
If you want the workplace to be in Israel - that should be done according to local laws
. Having an employee in Israel - means - the company would have a nexus in this country - and as a foreign
corporation will need to allocate part of its income to Israel. Employment taxes would be due to the Israel as well. Because of additional tax liability
and additional overhead to comply with Israel business and tax laws
- most likely - you want to avoid such route.
If the worker is a contractor - she will be treated as running her own business providing services to your company. In this case your company would not have any nexus in Israel - and would not be under jurisdiction of any Israel laws. The company would report compensation
to the contractor on form
1099MISC using her SSN - and all tax liability would be on that contractor.
Other issues are related to tax liability of the worker.
If the worker is an employee in the US - wages would not be considered as from foreign sources - and may not be excluded under foreign earned income
However as a resident of Israel - all worldwide income is taxable - so such wages will be taxable in both countries. You might be aware about the tax treaty in effect between these countries to avoid double taxation
- so she would be able to claim a foreign tax credit on her Israel tax return
If the worker is an independent contractor - she will be liable for all Israel taxes as self-employed person. Because services physically will be provided in Israel - the compensation would be classified as foreign earned income - so she may choose to either claim a foreign earned income exclusion or may claim a foreign tax credit for taxes paid to Israel on her US individual tax return
. Because Israel taxes are likely higher - most likely the net result in liability
would be about the same.
Please be aware that US citizens are required to report all worldwide income. US taxpayer living abroad are subject of laws and regulations
of both countries - and may not choose which law to use. So laws of both countries will be in effect.
Please let me know if you need any clarification or need details for any of mentioned aspects.