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For non US citizens working abroad for my USA company, my understandin

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g that a boiler plate...
For non US citizens working abroad for my USA company, my understandin g that a boiler plate independent contractor agreement is fine as there could never be any USA tax issues since these are not US citizens. Just have them fill out and sign a W8BEN. Is that right?

In an independent contractor agreement, any way to avoid a person who is a US citizen living outside the USA signing (claiming not to be a US citizen) and later causing issues?

All workers outside the USA would provide a W8-BEN - anything else needed?

For USA citizens who are working outside the USA and living outside the USA, would it be sufficient to avoid USA employment tax issues by signing the contract with a company they own as the worker or having their foreign wife sign it and be paid, but they then do the work?
Submitted: 5 years ago.Category: Tax
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Answered in 51 minutes by:
12/3/2012
Tax Professional: Lev, Tax Advisor replied 5 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,621
Experience: Taxes, Immigration, Labor Relations
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LEV :

Hi and welcome to Just Answer!
That is correct - payments to you personally as contractor are not subject of US taxes - as long as these services you provided outside the US. Form W8BEN is used to certify the status for nonresident aliens.
However - you would need to report your income in the country of your residence according to the local laws.
Payments to US persons - citizens and resident aliens - are reported on form 1099MISC and generally - you need to use W9 form to collect tax identification - regardless where payees are located.
The payer - to deduct such payment would need to keep supporting documents about payments. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.
All above is based on assumption that payments are paid to contractors - not employees. There are different rules for employees.

LEV :

Please be sure to ask for clarification if needed.

JACUSTOMER-1ooov5uk- :

These payments are paid to individuals working 45 hours a week, who are not US citizens who have signed an independent contractor agreement.

JACUSTOMER-1ooov5uk- :

Is there any case where a foreign person working outside the USA has been classified as an employee when working full time, having hours dictated by the company and so on?

JACUSTOMER-1ooov5uk- :

And finally, "For USA citizens who are working outside the USA and living outside the USA, would it be sufficient to avoid USA employment tax issues by signing the contract with a company they own as the worker or having their foreign wife sign it and be paid, but they then do the work?"

LEV :

It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. For such determination - the location where services are provided - is irrelevant.

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor.
Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination.

LEV :

Is there any case where a foreign person working outside the USA has been classified as an employee when working full time, having hours dictated by the company and so on?
I am not aware of such cases - however according to the IRS - such relation should not violate local laws - this most likely - the relation must likely be evaluated according to local employment laws - not US employment laws.

JACUSTOMER-1ooov5uk- :

For most of the items you listed, the answer is yes. So, if these people were working in the USA, then they would be considered employees. But out of the USA (e.g. internet based workers), 1) if they sign an independent contractor agreement but fall under 'employee' for usa based workers, what take does USA law and tax law have on them? 2) for US citizens, "For USA citizens who are working outside the USA and living outside the USA, would it be sufficient to avoid USA employment tax issues by signing the contract with a company they own as the worker or having their foreign wife sign it and be paid, but they then do the work?""

LEV :

For USA citizens who are working outside the USA and living outside the USA, would it be sufficient to avoid USA employment tax issues by signing the contract with a company they own as the worker or having their foreign wife sign it and be paid, but they then do the work?"
If a person provided services - that person is responsible to report compensation for such services as income - even "officially" such payment is made to another person. Reassigning wages to their foreign wives with intention to avoid tax liability is sound as tax fraud - and could be classified as a criminal offense.

JACUSTOMER-1ooov5uk- :

How about, " would it be sufficient to avoid USA employment tax issues by signing the contract with a company they own" ?

LEV :

1) if they sign an independent contractor agreement but fall under 'employee' for usa based workers, what take does USA law and tax law have on them?
As I mentioned above - such relation should not violate local laws - this most likely - the relation must likely be evaluated according to local employment laws - not US employment laws. I assume that local employment laws are similar - but that should be verified with a local tax specialist in the country where services are performed.

JACUSTOMER-1ooov5uk- :

My question is ONLY with regards to US tax laws. If a person is working full time for the company but working on behalf of their own company, are they classified as an employee or does their having a corporation (e.g. foreign corporation in this case) change things?

LEV :

How about, " would it be sufficient to avoid USA employment tax issues by signing the contract with a company they own" ?
That might be sufficient for the payer to avoid employment tax liability. But might not be sufficient to avoid employment and income taxes by US citizens - as well as other reporting requirements for reporting ownership of a foreign corporation.

JACUSTOMER-1ooov5uk- :

I am only looking at the aspect for my company. These people do not plan to go to the USA from what I understand so they don't care. I just want to avoid issues with my company. Thanks.

LEV :

My question is ONLY with regards to US tax laws.
The issue is that the IRS requires that local laws not to be violated. Thus if local laws are violated - according to US tax laws - deductions are disallowed.
If a person is working full time for the company but working on behalf of their own company, are they classified as an employee or does their having a corporation (e.g. foreign corporation in this case) change things?
If a person provided services to a corporation - he/she may be treated either as an employee or as a independent contractor based on common law rules I posted above. It doesn't matter if the same person owns shares of the corporation - still same tests should be evaluated. That is according to US tax laws.

LEV :

I just want to avoid issues with my company.
If you contracted with a foreign corporation and services are provided in a foreign country - you as a payer are not responsible for any withholding.
However - if you help or advise setting a foreign corporation as part of a scheme to avoid tax liability - your actions might be classified as a tax fraud - and most likely you want to avoid that.

JACUSTOMER-1ooov5uk- :

With regards to "My question is ONLY with regards to US tax laws.
The issue is that the IRS requires that local laws not to be violated. Thus if local laws are violated - according to US tax laws - deductions are disallowed." - can you give me some links to see the IRS ruling on this and /or cases to better undrestand?

JACUSTOMER-1ooov5uk- :

With regards to "If you contracted with a foreign corporation and services are provided in a foreign country - you as a payer are not responsible for any withholding." is it ok then to say that we can hire individuals or a business outside the USA but if a US citizen, he/she needs to work with the staffing agency we use (and the requirements that they have for a bank account in the USA, address, and so on). And leave it at that?

LEV :

Contracting an individual and contracting the corporation - that is the difference.
If you contracting (and paying) to the staffing agency (which is a foreign corporation) - that is one situation, however if you contracting an individual - the situation is different.
When you are using the bank account in the US and the USA, address for payments - there is a risk that the IRS will treat the payee as an US person (or entity) - and in case of audit - you would need to proof otherwise.

JACUSTOMER-1ooov5uk- :

With regards to "When you are using the bank account in the US and the USA, address for payments - there is a risk that the IRS will treat the payee as an US person (or entity) - and in case of audit - you would need to proof otherwise." is a signed independent contractor agreement + W8BEN enough to prove that the person was a foreign national or a foreign corporation being paid? (As well as issue the 1099 yearly)? Thanks.

LEV :

is a signed independent contractor agreement + W8BEN enough to prove that the person was a foreign national or a foreign corporation being paid?
Yes - signed W8BEN may be used as a proof - but in case of audit - all facts and circumstances might considered.
As well as issue the 1099 yearly.
Form 1099 is not issued to foreign persons and not issued to corporations.

JACUSTOMER-1ooov5uk- :

"but in case of audit - all facts and circumstances might considered." - what other steps should I take now to ensure that things are being done right? These are non-us citizens, they are signing an independent contractor agreement, but are working 45+ hours a week doing marketing, sales, etc. functions. And would be signing w8BEN. For us citizens, they would be either told to sign up with a staffing agency or to engage on behalf of their own company. What else should I be making sure is done to ensure done right? Thanks.

LEV :

If you want to to be liable for withholding:
1. contract with the foreign corporation that doesn't have presence in the US
2. payment to the foreign corporation
3. all services are provided outside the US.

JACUSTOMER-1ooov5uk- :

"If you want to to be liable for withholding:" - you mean "not to", right? If the foreign corporation is a sole proprietorship, I assume that the benefit won't hold and that it has to be a corporation (equivalent of llc/ s/c corp in states), right?

LEV :

Yes - NOT to be liable for withholding - sorry for typo.

LEV :

A sole proprietorship - means you are contracting with individual - not with a corporation. The same is true if you contracting with a disregarded entity - like LLC - that means - payment is made to the physical individual.

JACUSTOMER-1ooov5uk- :

So to confirm, must be a corporation formed that is not a disregarded entity that would be contracted or put them on payroll with a staffing agency, right?

LEV :

What the corporation made with the money you pay for services - should not be your concern. If you plan HOW that foreign corporation pays individuals - that makes you part of the tax avoidance scheme - and that is what you might want to avoid.

JACUSTOMER-1ooov5uk- :

I'm only planning our internal policy for who is engaged. So as long as we limit to "You can work with us as a foreign corporation or through payroll service" and not go beyond that, we are fine, correct?

LEV :

"You can work with us" - that what makes difference.
Your statement I think should be - "we are contracting and paying ONLY to corporations"

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