All You Need to Know When Hiring Foreign Independent Contractors

Remote work and hiring independent contractors outside of the US has become a trend, if not a norm. However, many companies do not realize the legal implications and risks a cross-border work relationship carries. This guide will change that.

Written by Anja Simic
October 18, 2021

All You Need to Know When Hiring Foreign Independent Contractors

Remote work and hiring independent contractors outside of the US has become a trend, if not a norm. However, many companies do not realize the legal implications and risks a cross-border work relationship carries. This guide will change that.

Written by Anja Simic
October 18, 2021

All You Need to Know When Hiring Foreign Independent Contractors

Remote work and hiring independent contractors outside of the US has become a trend, if not a norm. However, many companies do not realize the legal implications and risks a cross-border work relationship carries. This guide will change that.

All You Need to Know When Hiring Foreign Independent Contractors

Remote work and hiring independent contractors outside of the US has become a trend, if not a norm. However, many companies do not realize the legal implications and risks a cross-border work relationship carries. This guide will change that.

The all-connected modern environment brings many significant advantages to companies and startups around the world. Hiring independent contractors outside of the US and managing remote workers has become a trend, if not a norm. A US company can expand its independent contractor pool to many countries worldwide and start collaborating with freelancers in Argentina, Japan, South Africa, or Spain. Being able to expand your talent pool internationally can be a transformative outcome for your company, no matter what industry you're in.

However, many business owners do not realize the legal implications and risks a cross-border work relationship carries. This guide is designed to help you determine what your company needs to consider to hire legally and compliantly.

Who this guide is for
We've written this for any company in the world who wants to hire internationally. There's additional specific content for US-based companies in particular, but many of those concepts will have similarities that carry over to other countries. If you're curious about a particular situation in your country, feel free to reach out to us--we support over 150 countries and their associated laws.

Disclaimer: This article is for informational purposes only and does not serve as legal advice. Although we try to keep it up to date, always check for the latest information on the respective institutions' websites.

Different setups for working with foreign workers

There are three setups to choose from when you want to hire people internationally:

  • Opening a subsidiary
  • Hiring a PEO using employer of record (EOR) services
  • Hiring independent contractors

Opening a subsidiary

Opening a local subsidiary involves establishing a new legal entity in the foreign country, which then hires the workers as local employees. This requires setting up local bank accounts, operating permits, and tax IDs, so it involves substantial legal work. When a company plans to hire multiple workers in a particular country, opening a local subsidiary can be an efficient option. For example, Amazon has a subsidiary called Amazon Canada to hire workers in Canada. For most businesses however, this setup is too complex for their needs.

Professional employer organization (PEO) and employer of record (EOR) services

This setup involves contracting an outsourcing firm that does all the HR services such as international payroll, benefits, tax reporting, and training, on your behalf. The employer of record (sometimes referred to as global PEO) enters into a contractual co-employment agreement and becomes the hiring party on behalf of the company. This setup is necessary when hiring independent contractors is not an option, and the workers must be hired as full-time employees.

Hiring independent contractors

Companies of all sizes can hire independent contractors. Hiring contractors has multiple benefits:

  • the possibility to employ foreign or short-term workers
  • savings on worker costs
  • ease of contractor relationships

But although it's the easiest to set up, hiring independent contractors can lead to tax evasion charges and IRS audits down the road if local laws and different contractor setups are not well understood. To help break this down, we'll first go over the differences between independent contractors and employees, then explain how independent contractors are classified and handled by law.

Who is an independent contractor?

Independent contractors are people who offer their professional services to clients. They are usually self-employed owners of small businesses that you hire for a fixed period of time or on a per-project basis. Independent contractors may go by similar names such as 1099 contractors, freelancers or self-employed workers.

Every country has own ways of precisely defining the "independence" part of the independent contractor. In the US, the IRS says generally "an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."

Put another way, one of the main factors in determining the relationship between the client and the independent contractor is the degree of control. If the payer in any way controls the work in terms of working hours or activities, the relationship might be viewed as employment. We go more in-depth about the differences between contractors and employees on our blog.

Who is an employee?

On the other hand, if the company controls the performance as a whole, the service provider is considered an employee. On top of that, if the company also reimburses expenses, provides tools, conducts training, and offers paid vacation and benefits, the service provider is most likely an employee. If an employment contract is in place, the worker's status is evident, but independent contractors can start resembling employees in some scenarios. In those cases, there is a need to determine their status.

Determining if a person is an independent contractor or an employee: the classification process

Sometimes it's easy to figure out if a worker is an independent contractor. Someone you hire to redesign your corporate website would likely be a contractor. But what if that person is responsible for consistent updates over several years?

When the lines start to get blurred, a company must weigh all the factors when determining whether a worker is an employee or an independent contractor. Some factors might indicate that the worker is an employee, while others suggest that the worker is an independent contractor.

In the US, the IRS says there is no set number of factors that make the worker one or another, and no one factor stands alone in making this determination. You can use the IRS's 20 Factor test, which outlines 20 factors you can consider to give you an overview of what an independent relationship looks like.

If you are still unsure and need additional support, you can ask the IRS to weigh in on the matter by completing Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding). The IRS may take at least six months to review your case and provide you with a determination.

The classification process for international independent contractors

As we already mentioned, each country regulates the factors determining the relationship between the payer and the service provider. Just because a person is considered a contractor in one country doesn't prove that they are contractors in another country. When you hire an international independent contractor, take extra care to ensure they won't be considered an employee according to their local laws as well.

Each country has its own laws to determine whether someone should be considered an independent contractor, and many countries have revised their policies in recent years. As examples, in the United Kingdom, employers use the Off-payroll working (IR35) legislation, while in Serbia, they use the Independence Test for lump-sum taxpayers.

Some countries also require obtaining a contractor license, which can help with avoiding misclassification risks. We go through these different requirements country-by-country in the local compliance section on our blog.

One more thing to keep in mind: some countries do not have an "independent contractor" classification. Some of them have different setups, such as entrepreneur, auto-entrepreneur, sole-trader, freelancer, etc. It's helpful to keep the proper compliance documents based on the structure the worker has.

To ensure you are not at risk of misclassification, you may want to invest in local legal counsel that can help you determine how local laws interpret a working relationship.

How to avoid misclassification of independent contractors?

The misclassification of workers is often involuntary, but sometimes it can be done in a deliberate way. Some companies will classify an employee as an independent contractor on purpose to reduce payroll costs because independent contractors don't qualify for employee benefits such as vacation or overtime pay, minimum wage, and social security payments. Misclassifying employees as contractors also deprives them of rights, protections, and benefits that federal law entitles them to.

Therefore, misclassifying independent contractors can lead to major employment law violations and tax penalties. In substantial cases, penalties can turn out to be in the hundreds of thousands of dollars.

You can review our employee misclassification guide for more details on the tests used to classify workers.

Hire employees abroad, without setting up an entity

Get access to the world’s best talent. Hire full-time employees in 150 countries without having to set up a legal entity in a new country.

Learn more

Creating an independent contractor agreement

When you've rightfully classified your hire as a contractor, it's time to put things into paper. A substantial written agreement is essential when you are hiring any contractor, especially a foreign one. A written contract will protect both you and the contractor from misunderstandings and ensure both parties hold up their end of the deal.

While it might sound like a time-saver, avoid using a contract template you find online because they usually don't have all the necessary elements or consider only the laws of one country. You'll be risking a lot in the case of a lawsuit or dispute. There is no one-size-fits-all independent contractor agreement, so take time to create a contract that takes into account the local labor law regulations of both countries involved. Keep in mind that local regulations also determine the length of the contract, and ensure you periodically review the contract and revise it if the scope of work has changed.

A well-written agreement should always outline the following:

  • Scope of work detailing the services offered by the independent contractor.
  • Compensation and expenses if applicable.
  • Relationship of the parties, including the status of each party, liability, and indemnification clauses.
  • Ownership of work. Keep in mind that not all countries have the same regulations regarding ownership and intellectual property. In some countries, the work is owned by the independent contractor.
  • Confidentiality and data protection clauses. You can also include an NDA clause.
  • A non-compete clause that determines the activities limiting the contractor from doing the work for a competitor.
  • Termination and notice clauses that outline the duration of the contract.
  • Governing law appointing the legal body responsible in case of disputes.

Further reading:

How to pay foreign independent contractors

Paying foreign independent contractors is more complex that sending money to their bank account. You need to assess different payment options that make sense for both you and the independent contractor. Our complete guide on how to pay foreign independent contractors covers the variety of payment methods available as well as the pros and cons of each.

Reporting income and the tax responsibilities

Independent contractors are responsible for their own taxes. Companies who hire independent contractors generally do not need to worry about payroll taxes. The responsibility of reporting self-employment tax falls solely on the contractor. However, even though the contractor pays their own self-employment taxes, depending on the contractor's country, the company is still responsible for compiling and reporting the total compensation on the appropriate tax slips.

Reporting income of non-US citizens living outside of the US

The US tax rate applies to anyone who has made income in the US, regardless of their citizenship. That means that if an independent contractor is not a US citizen but has made income in the US, they still have to pay taxes according to the US rates.

This sounds like a bad deal, because international contractors would be double-taxed: once by the US government, for earning US income, and again by their home government, for earning foreign income. However, many governments establish tax treaties with each other, where they agree to waive or reduce taxes for their counterpart residents.

A complete list of countries that have a tax treaty with the US is on the IRS website. Most countries, including Australia, Canada, France, and UK have some sort of tax treaty with the US.

How to determine whether the income is US-sourced or not?

According to the IRS, the source income gained by offering services is determined by the location where the services are performed. That said, even if an overseas independent contractor works for a US company, the income they receive is not considered US-sourced income as long as every aspect of the service is performed outside of the US. In that case, a US company should not withhold or report taxes. If a foreign independent contractor conducts any part of their services in the US, certain conditions need to be met to avoid tax obligation:

  • The contractor was present in the US for no more than 90 days in a tax year;
  • The payment to the contractor is lower than $3,000;
  • The payment to the contractor is for services performed for an entity or office maintained in a foreign country.

How to collect tax forms for contractors required by the IRS?

File IRS Form 1099-NEC to report US-sourced income to the IRS

If your US-based company hires US-based contractors who earn more than $600 within a year, you need to report how much they earned by filing IRS Form 1099-NEC (Non-Employee Compensation) to the IRS each year. The deadline to file Form 1099-NEC is January 31st for the previous tax year.

Note that the form changed in tax year 2020. Form 1099-NEC replaces Form 1099-MISC for reporting payments to non-employees. What used to be Box 7 on the Form 1099-MISC became Box 1 on the Form 1099-NEC.

On the 1099-NEC, employers report the total payments made during the year to any contractor that received more than $600. All four of these conditions must be met:

  • It is made to someone who is not your employee
  • It is made for services in the course of your trade or business
  • It was made to an individual, partnership, estate, or, in some cases, a corporation
  • The payments made to that payee were at least $600 or more for the year

Form 1099-MISC will continue to exist, but used for other purposes like reporting rent payments. Our blog has more info on differences between 1099 NEC and 1099 MISC forms.

How to collect IRS Form W-9 for 1099 contractors?

US companies use IRS Form W-9 (Request for Taxpayer Identification Number and Certification) to get information from independent contractors they hire who are based in the United States.

Form W-9 lets employers collect the name, address, and Social Security Number (or Tax Identification Number, known as TIN) of the 1099 contractor in question. Keep in mind that sometimes contractors acting as business owners might give you their Employer Identification Number (EIN) instead.  Employers only need to ask for a filled-out Form W-9 from contractors they paid more than $600 in the course of a year. This form does not need to be submitted to the IRS since it is only a prerequisite for filling out Form 1099-NEC.

How to collect IRS Form W-8BEN (or W-8BEN-E) for foreign independent contractors?

The equivalent of the Form W-9 for foreign contractors is the IRS Form W-8BEN. It has two variations: Form W-8BEN for individuals and Form W-8BEN-E for foreign companies or self-employed workers operating under a business entity).

These forms are used to self-certify that a person (or entity) is not, in fact, a US citizen. The hiring company is entitled to rely on the claims made on these forms to determine obligations regarding tax reporting and withholding. If you don't collect a W-8BEN from your contractor, you're obligated to withhold a 30% income tax from their pay.

Every US company should have their foreign contractors complete this form. These forms are valid for three years and should be renewed if the working relationship continues beyond that time. You can learn more about W-8BEN forms on the IRS' W-8BEN page.

Tax implications for US companies hiring independent contractors‍

Hiring an independent contractor who is a US citizen living in the US (1099 contractor)

From the perspective of a US company, this is the most straightforward setup. The first step is to request the contractor to provide Form W-9. The company that hired the contractor will need to issue a Form 1099-NEC by January 31st to report payments higher than $600 in the previous year. The company doesn't have to withhold any tax before making a payment to the contractor. Remember that the company doesn't pay any payroll taxes, health insurance, workers' compensation insurance, or any other FICA taxes.

Hiring a foreign independent contractor living outside of the US

The US company doesn't need to report the payments they made to the foreign independent contractor to the IRS if they are not US-sourced income. The company also doesn't need to withhold any tax. However, the company does need to collect W-8BEN(E) as proof of the contractor's status.

An independent contractor who lives in the US with a visa that allows them to work in the US

The visa itself is not a determining factor in deciding if taxation applies. The place where the service is performed determines the source of the income. If the foreign contractor lives and delivers their services in the US, the income is considered US-sourced, and the company must withhold 30% as per non-resident tax rates. However, these rules do not apply if a tax treaty exists between the countries (mentioned earlier in this article) or if a person becomes a resident.

In addition to withholding tax, the company needs to file Form 1042, Annual Withholding Tax Return for US Source Income of Foreign Persons, by March 15th of the following year. Learn more about the Form and requirements here. If there is a tax treaty between the US and the contractor's country, the contractor should file Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Non-resident Alien Individual.

A US company hiring independent contractors in Canada

Canada is one of the most popular countries for US companies to hire contractors; the shared language, culture, and proximity make Canadian freelancers the preferred choice of HR departments.

If you are hiring a Canadian contractor to provide services to your company remotely, the additional rules and regulations you'll want to follow will be set by Canada's equivalent to the IRS, the CRA (Canada Revenue Agency). Like its US counterpart, the CRA imposes penalties for misclassification of employees, but in cases where companies don't have a presence in Canada, the burden of the penalties falls on the contractor.

You'll want to collect a W-8BEN form in order to waive the withholding tax from their pay. At the end of the tax year, you do not need to provide a Canadian independent contractor with a W-2 form because W-2 forms are for reporting employee compensation. You also do not need to provide a 1099-NEC or 1099-NEC because those are for US taxpayers. Of course, the independent contractor is still expected to report their income to the CRA.

One extra note: citizens of Canada (and Mexico) are also allowed to physically work within the US temporarily without a visa. If a person makes US-sourced income as a non-resident, the hiring company will need to withhold 30% before payment is made and file a Form 1042 (Annual Withholding Tax Return for US Source Income of Foreign Persons). In case of a tax treaty, Form 8233 (Exemption From Withholding) can be used to claim a tax exemption.

Read more about how to hire and pay workers in Canada as a US employer.

How to hire an independent contractor who is a US citizen but lives abroad

The general rule is that US citizens are subject to the same tax rules regardless of their location. The IRS will still consider an independent contractor as a US citizen if the service is performed abroad, and even if the contractor has spent sufficient time to be considered a tax resident of another country. The company should continue to issue a Form 1099-NEC (given they paid the contractor more than $600 within a year), just like it would to its domestically-based US resident contractors. There are some cases where the tax implications change, so we advise you to take a look at IRS Publication 54, the Tax Guide for US Citizens and Resident Aliens Abroad or consult their FAQ page about International Individual Tax Matters.

Streamline working with independent contractors with Deel worldwide

Deel helps companies streamline onboarding and work with remote talent wherever they are.

Our all-in-one solution covers:
  • Local labor law-compliant sample contracts that take into account both parties' countries
  • Collecting W-9, W-8BEN, and 1099 forms and filling them electronically directly to the IRS
  • Sending payments using multiple payment methods, local payouts, and 100 currencies covering 150+ countries
  • Collecting compliance documents according to each country's requirements to avoid misclassification risks
  • Hiring a full-time employee or switching an independent contractor to an employee status fast using Deel employer of record services, keeping everything under one roof.

Learn how you can hire and pay contractors anywhere in the world and schedule a demo to see Deel in action.

The all-connected modern environment brings many significant advantages to companies and startups around the world. Hiring independent contractors outside of the US and managing remote workers has become a trend, if not a norm. A US company can expand its independent contractor pool to many countries worldwide and start collaborating with freelancers in Argentina, Japan, South Africa, or Spain. Being able to expand your talent pool internationally can be a transformative outcome for your company, no matter what industry you're in.

However, many business owners do not realize the legal implications and risks a cross-border work relationship carries. This guide is designed to help you determine what your company needs to consider to hire legally and compliantly.

Who this guide is for
We've written this for any company in the world who wants to hire internationally. There's additional specific content for US-based companies in particular, but many of those concepts will have similarities that carry over to other countries. If you're curious about a particular situation in your country, feel free to reach out to us--we support over 150 countries and their associated laws.

Disclaimer: This article is for informational purposes only and does not serve as legal advice. Although we try to keep it up to date, always check for the latest information on the respective institutions' websites.

Different setups for working with foreign workers

There are three setups to choose from when you want to hire people internationally:

  • Opening a subsidiary
  • Hiring a PEO using employer of record (EOR) services
  • Hiring independent contractors

Opening a subsidiary

Opening a local subsidiary involves establishing a new legal entity in the foreign country, which then hires the workers as local employees. This requires setting up local bank accounts, operating permits, and tax IDs, so it involves substantial legal work. When a company plans to hire multiple workers in a particular country, opening a local subsidiary can be an efficient option. For example, Amazon has a subsidiary called Amazon Canada to hire workers in Canada. For most businesses however, this setup is too complex for their needs.

Professional employer organization (PEO) and employer of record (EOR) services

This setup involves contracting an outsourcing firm that does all the HR services such as international payroll, benefits, tax reporting, and training, on your behalf. The employer of record (sometimes referred to as global PEO) enters into a contractual co-employment agreement and becomes the hiring party on behalf of the company. This setup is necessary when hiring independent contractors is not an option, and the workers must be hired as full-time employees.

Hiring independent contractors

Companies of all sizes can hire independent contractors. Hiring contractors has multiple benefits:

  • the possibility to employ foreign or short-term workers
  • savings on worker costs
  • ease of contractor relationships

But although it's the easiest to set up, hiring independent contractors can lead to tax evasion charges and IRS audits down the road if local laws and different contractor setups are not well understood. To help break this down, we'll first go over the differences between independent contractors and employees, then explain how independent contractors are classified and handled by law.

Who is an independent contractor?

Independent contractors are people who offer their professional services to clients. They are usually self-employed owners of small businesses that you hire for a fixed period of time or on a per-project basis. Independent contractors may go by similar names such as 1099 contractors, freelancers or self-employed workers.

Every country has own ways of precisely defining the "independence" part of the independent contractor. In the US, the IRS says generally "an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."

Put another way, one of the main factors in determining the relationship between the client and the independent contractor is the degree of control. If the payer in any way controls the work in terms of working hours or activities, the relationship might be viewed as employment. We go more in-depth about the differences between contractors and employees on our blog.

Who is an employee?

On the other hand, if the company controls the performance as a whole, the service provider is considered an employee. On top of that, if the company also reimburses expenses, provides tools, conducts training, and offers paid vacation and benefits, the service provider is most likely an employee. If an employment contract is in place, the worker's status is evident, but independent contractors can start resembling employees in some scenarios. In those cases, there is a need to determine their status.

Determining if a person is an independent contractor or an employee: the classification process

Sometimes it's easy to figure out if a worker is an independent contractor. Someone you hire to redesign your corporate website would likely be a contractor. But what if that person is responsible for consistent updates over several years?

When the lines start to get blurred, a company must weigh all the factors when determining whether a worker is an employee or an independent contractor. Some factors might indicate that the worker is an employee, while others suggest that the worker is an independent contractor.

In the US, the IRS says there is no set number of factors that make the worker one or another, and no one factor stands alone in making this determination. You can use the IRS's 20 Factor test, which outlines 20 factors you can consider to give you an overview of what an independent relationship looks like.

If you are still unsure and need additional support, you can ask the IRS to weigh in on the matter by completing Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding). The IRS may take at least six months to review your case and provide you with a determination.

The classification process for international independent contractors

As we already mentioned, each country regulates the factors determining the relationship between the payer and the service provider. Just because a person is considered a contractor in one country doesn't prove that they are contractors in another country. When you hire an international independent contractor, take extra care to ensure they won't be considered an employee according to their local laws as well.

Each country has its own laws to determine whether someone should be considered an independent contractor, and many countries have revised their policies in recent years. As examples, in the United Kingdom, employers use the Off-payroll working (IR35) legislation, while in Serbia, they use the Independence Test for lump-sum taxpayers.

Some countries also require obtaining a contractor license, which can help with avoiding misclassification risks. We go through these different requirements country-by-country in the local compliance section on our blog.

One more thing to keep in mind: some countries do not have an "independent contractor" classification. Some of them have different setups, such as entrepreneur, auto-entrepreneur, sole-trader, freelancer, etc. It's helpful to keep the proper compliance documents based on the structure the worker has.

To ensure you are not at risk of misclassification, you may want to invest in local legal counsel that can help you determine how local laws interpret a working relationship.

How to avoid misclassification of independent contractors?

The misclassification of workers is often involuntary, but sometimes it can be done in a deliberate way. Some companies will classify an employee as an independent contractor on purpose to reduce payroll costs because independent contractors don't qualify for employee benefits such as vacation or overtime pay, minimum wage, and social security payments. Misclassifying employees as contractors also deprives them of rights, protections, and benefits that federal law entitles them to.

Therefore, misclassifying independent contractors can lead to major employment law violations and tax penalties. In substantial cases, penalties can turn out to be in the hundreds of thousands of dollars.

You can review our employee misclassification guide for more details on the tests used to classify workers.

Creating an independent contractor agreement

When you've rightfully classified your hire as a contractor, it's time to put things into paper. A substantial written agreement is essential when you are hiring any contractor, especially a foreign one. A written contract will protect both you and the contractor from misunderstandings and ensure both parties hold up their end of the deal.

While it might sound like a time-saver, avoid using a contract template you find online because they usually don't have all the necessary elements or consider only the laws of one country. You'll be risking a lot in the case of a lawsuit or dispute. There is no one-size-fits-all independent contractor agreement, so take time to create a contract that takes into account the local labor law regulations of both countries involved. Keep in mind that local regulations also determine the length of the contract, and ensure you periodically review the contract and revise it if the scope of work has changed.

A well-written agreement should always outline the following:

  • Scope of work detailing the services offered by the independent contractor.
  • Compensation and expenses if applicable.
  • Relationship of the parties, including the status of each party, liability, and indemnification clauses.
  • Ownership of work. Keep in mind that not all countries have the same regulations regarding ownership and intellectual property. In some countries, the work is owned by the independent contractor.
  • Confidentiality and data protection clauses. You can also include an NDA clause.
  • A non-compete clause that determines the activities limiting the contractor from doing the work for a competitor.
  • Termination and notice clauses that outline the duration of the contract.
  • Governing law appointing the legal body responsible in case of disputes.

Further reading:

How to pay foreign independent contractors

Paying foreign independent contractors is more complex that sending money to their bank account. You need to assess different payment options that make sense for both you and the independent contractor. Our complete guide on how to pay foreign independent contractors covers the variety of payment methods available as well as the pros and cons of each.

Hire employees abroad, without setting up an entity

Get access to the world’s best talent. Hire full-time employees in 150 countries without having to set up a legal entity in a new country.

Learn more

Reporting income and the tax responsibilities

Independent contractors are responsible for their own taxes. Companies who hire independent contractors generally do not need to worry about payroll taxes. The responsibility of reporting self-employment tax falls solely on the contractor. However, even though the contractor pays their own self-employment taxes, depending on the contractor's country, the company is still responsible for compiling and reporting the total compensation on the appropriate tax slips.

Reporting income of non-US citizens living outside of the US

The US tax rate applies to anyone who has made income in the US, regardless of their citizenship. That means that if an independent contractor is not a US citizen but has made income in the US, they still have to pay taxes according to the US rates.

This sounds like a bad deal, because international contractors would be double-taxed: once by the US government, for earning US income, and again by their home government, for earning foreign income. However, many governments establish tax treaties with each other, where they agree to waive or reduce taxes for their counterpart residents.

A complete list of countries that have a tax treaty with the US is on the IRS website. Most countries, including Australia, Canada, France, and UK have some sort of tax treaty with the US.

How to determine whether the income is US-sourced or not?

According to the IRS, the source income gained by offering services is determined by the location where the services are performed. That said, even if an overseas independent contractor works for a US company, the income they receive is not considered US-sourced income as long as every aspect of the service is performed outside of the US. In that case, a US company should not withhold or report taxes. If a foreign independent contractor conducts any part of their services in the US, certain conditions need to be met to avoid tax obligation:

  • The contractor was present in the US for no more than 90 days in a tax year;
  • The payment to the contractor is lower than $3,000;
  • The payment to the contractor is for services performed for an entity or office maintained in a foreign country.

How to collect tax forms for contractors required by the IRS?

File IRS Form 1099-NEC to report US-sourced income to the IRS

If your US-based company hires US-based contractors who earn more than $600 within a year, you need to report how much they earned by filing IRS Form 1099-NEC (Non-Employee Compensation) to the IRS each year. The deadline to file Form 1099-NEC is January 31st for the previous tax year.

Note that the form changed in tax year 2020. Form 1099-NEC replaces Form 1099-MISC for reporting payments to non-employees. What used to be Box 7 on the Form 1099-MISC became Box 1 on the Form 1099-NEC.

On the 1099-NEC, employers report the total payments made during the year to any contractor that received more than $600. All four of these conditions must be met:

  • It is made to someone who is not your employee
  • It is made for services in the course of your trade or business
  • It was made to an individual, partnership, estate, or, in some cases, a corporation
  • The payments made to that payee were at least $600 or more for the year

Form 1099-MISC will continue to exist, but used for other purposes like reporting rent payments. Our blog has more info on differences between 1099 NEC and 1099 MISC forms.

How to collect IRS Form W-9 for 1099 contractors?

US companies use IRS Form W-9 (Request for Taxpayer Identification Number and Certification) to get information from independent contractors they hire who are based in the United States.

Form W-9 lets employers collect the name, address, and Social Security Number (or Tax Identification Number, known as TIN) of the 1099 contractor in question. Keep in mind that sometimes contractors acting as business owners might give you their Employer Identification Number (EIN) instead.  Employers only need to ask for a filled-out Form W-9 from contractors they paid more than $600 in the course of a year. This form does not need to be submitted to the IRS since it is only a prerequisite for filling out Form 1099-NEC.

How to collect IRS Form W-8BEN (or W-8BEN-E) for foreign independent contractors?

The equivalent of the Form W-9 for foreign contractors is the IRS Form W-8BEN. It has two variations: Form W-8BEN for individuals and Form W-8BEN-E for foreign companies or self-employed workers operating under a business entity).

These forms are used to self-certify that a person (or entity) is not, in fact, a US citizen. The hiring company is entitled to rely on the claims made on these forms to determine obligations regarding tax reporting and withholding. If you don't collect a W-8BEN from your contractor, you're obligated to withhold a 30% income tax from their pay.

Every US company should have their foreign contractors complete this form. These forms are valid for three years and should be renewed if the working relationship continues beyond that time. You can learn more about W-8BEN forms on the IRS' W-8BEN page.

Tax implications for US companies hiring independent contractors‍

Hiring an independent contractor who is a US citizen living in the US (1099 contractor)

From the perspective of a US company, this is the most straightforward setup. The first step is to request the contractor to provide Form W-9. The company that hired the contractor will need to issue a Form 1099-NEC by January 31st to report payments higher than $600 in the previous year. The company doesn't have to withhold any tax before making a payment to the contractor. Remember that the company doesn't pay any payroll taxes, health insurance, workers' compensation insurance, or any other FICA taxes.

Hiring a foreign independent contractor living outside of the US

The US company doesn't need to report the payments they made to the foreign independent contractor to the IRS if they are not US-sourced income. The company also doesn't need to withhold any tax. However, the company does need to collect W-8BEN(E) as proof of the contractor's status.

An independent contractor who lives in the US with a visa that allows them to work in the US

The visa itself is not a determining factor in deciding if taxation applies. The place where the service is performed determines the source of the income. If the foreign contractor lives and delivers their services in the US, the income is considered US-sourced, and the company must withhold 30% as per non-resident tax rates. However, these rules do not apply if a tax treaty exists between the countries (mentioned earlier in this article) or if a person becomes a resident.

In addition to withholding tax, the company needs to file Form 1042, Annual Withholding Tax Return for US Source Income of Foreign Persons, by March 15th of the following year. Learn more about the Form and requirements here. If there is a tax treaty between the US and the contractor's country, the contractor should file Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Non-resident Alien Individual.

A US company hiring independent contractors in Canada

Canada is one of the most popular countries for US companies to hire contractors; the shared language, culture, and proximity make Canadian freelancers the preferred choice of HR departments.

If you are hiring a Canadian contractor to provide services to your company remotely, the additional rules and regulations you'll want to follow will be set by Canada's equivalent to the IRS, the CRA (Canada Revenue Agency). Like its US counterpart, the CRA imposes penalties for misclassification of employees, but in cases where companies don't have a presence in Canada, the burden of the penalties falls on the contractor.

You'll want to collect a W-8BEN form in order to waive the withholding tax from their pay. At the end of the tax year, you do not need to provide a Canadian independent contractor with a W-2 form because W-2 forms are for reporting employee compensation. You also do not need to provide a 1099-NEC or 1099-NEC because those are for US taxpayers. Of course, the independent contractor is still expected to report their income to the CRA.

One extra note: citizens of Canada (and Mexico) are also allowed to physically work within the US temporarily without a visa. If a person makes US-sourced income as a non-resident, the hiring company will need to withhold 30% before payment is made and file a Form 1042 (Annual Withholding Tax Return for US Source Income of Foreign Persons). In case of a tax treaty, Form 8233 (Exemption From Withholding) can be used to claim a tax exemption.

Read more about how to hire and pay workers in Canada as a US employer.

How to hire an independent contractor who is a US citizen but lives abroad

The general rule is that US citizens are subject to the same tax rules regardless of their location. The IRS will still consider an independent contractor as a US citizen if the service is performed abroad, and even if the contractor has spent sufficient time to be considered a tax resident of another country. The company should continue to issue a Form 1099-NEC (given they paid the contractor more than $600 within a year), just like it would to its domestically-based US resident contractors. There are some cases where the tax implications change, so we advise you to take a look at IRS Publication 54, the Tax Guide for US Citizens and Resident Aliens Abroad or consult their FAQ page about International Individual Tax Matters.

Streamline working with independent contractors with Deel worldwide

Deel helps companies streamline onboarding and work with remote talent wherever they are.

Our all-in-one solution covers:
  • Local labor law-compliant sample contracts that take into account both parties' countries
  • Collecting W-9, W-8BEN, and 1099 forms and filling them electronically directly to the IRS
  • Sending payments using multiple payment methods, local payouts, and 100 currencies covering 150+ countries
  • Collecting compliance documents according to each country's requirements to avoid misclassification risks
  • Hiring a full-time employee or switching an independent contractor to an employee status fast using Deel employer of record services, keeping everything under one roof.

Learn how you can hire and pay contractors anywhere in the world and schedule a demo to see Deel in action.