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Compliance

Do foreign independent contractors need to be issued tax forms and pay US taxes?

April 19, 2021
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Are you ready to explore career opportunities outside of your country? Working as a foreign contractor has lots of benefits both for you and your potential employer, so it’s no wonder many companies are more than happy to choose this kind of business relationship lately.

However, paying taxes, reporting your income, and keeping up with all the regulations may give you headaches and make you second-guess your decision to look for work abroad.

We’ve prepared this article to help you clear your doubts, so you never have to miss a great work opportunity because of a lack of information.

How can you work for a US-based company?

Hiring independent contractors is common among US companies regardless of the size of a business. It has many benefits, such as being cost-effective for the employer and the simplicity of the business relationship. On the other hand, it’s also beneficial for contractors, who have more freedom to organize their work and choose where they want to work from.

When starting as a foreign independent contractor, you need to ensure that:

  1. According to your contract, you are truly a contractor and not an employee
  2. The contract is compliant with the local labor law (depending on where the work is performed)

If you’re not sure whether you should be an employee or an independent contractor, consider the way you work.

Does your employer control your schedule, how you work, when, and where? If so, you should have employee status. If they only have control over the results of your work, you’re an independent contractor.

However, not all cases are as straightforward, so this 20-factor test may help you determine your status for sure.


Do you need to pay US taxes as a foreign independent contractor?

Even if you’re a foreigner, your income may still be taxable in the US. There are three possible scenarios:

You work in the US, but your country has a tax treaty with the US

If you perform work in the US because you have a working visa, but you’re not a US citizen, you may be exempt from US taxes or need to pay it at a reduced rate.

This is true if your country has a tax treaty with the US. In that case, you need to fill in Form 8233 - Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.

This applies to certain items of your income received from sources within the States. If you’re not sure whether your country has a treaty with the US, you can check the list on the official IRS website.

You work in the US, and there’s no tax treaty between your country and the US

If there isn’t a tax treaty between the US and your country, the employer needs to withhold from your payment the full amount of income tax for non-residents, which is 30%.

If there’s any part of the service done in the US, you need to meet these conditions if you want to avoid tax obligations.

  • You haven’t spent more than 90 days in a tax year in the US
  • You have made $3,000 or less
  • You have performed services for an office or entity maintained in a foreign country

Are you unsure whether the income is US-sourced? The IRS says you determine the source of income by determining the location the services are performed at. That means you don’t earn US-sourced income if you’re located in your country or anywhere outside the US while performing work, despite working for a US-based company.

In cases like that, the US employer isn’t in obligation to withhold any taxes from your income or report it.

Note that for any US-sourced income you need to get Form 1099-NEC from your employer so you can report your earnings appropriately.

You live and perform all the work in your country

Form W-8BEN is used for foreign individuals that perform work outside the US. In this case, your income isn’t taxable in the US, and you’re responsible for paying your own taxes in your country.

The purpose of these forms is to prove that you aren’t a US citizen. When working with foreign contractors, it’s critical that the employer collects this form since it protects them if the information you provide is for any reason false or incomplete. That’s why it’s vital to fill in the form accurately.

In case you’re acting as a business entity, you’ll receive Form W-8BEN-E from your employer. This form has the same purpose as W-8BEN and is also used for individuals who are self-employed.

One form is valid for three years and you need to submit a new one if any of the information changes or your collaboration with the employer continues for longer than three years.

Is your contract compliant with the local labor law?

Your employer needs to ensure that your contract complies with your local labor law, too. To avoid employee misclassification and potential penalties and legal issues, they must take local compliance into account, so be sure to check that when signing your contract.

If you want to learn more about working as a foreign independent contractor, check out this article.

Disclaimer: This article serves for informational purposes only and is not intended as tax advice. IRS regulations can be subject to change, so before you submit the forms, please check for the newest updates on www.irs.gov. We also advise you to consult an official tax advisor before taking any action.

Tax documents

Automate your tax document collection

From collecting tax forms to storing them all in one place, we automate everything, so you can stay focused on growing your business.

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Back to blog
Compliance

Do foreign independent contractors need to be issued tax forms and pay US taxes?

April 19, 2021

Are you ready to explore career opportunities outside of your country? Working as a foreign contractor has lots of benefits both for you and your potential employer, so it’s no wonder many companies are more than happy to choose this kind of business relationship lately.

However, paying taxes, reporting your income, and keeping up with all the regulations may give you headaches and make you second-guess your decision to look for work abroad.

We’ve prepared this article to help you clear your doubts, so you never have to miss a great work opportunity because of a lack of information.

How can you work for a US-based company?

Hiring independent contractors is common among US companies regardless of the size of a business. It has many benefits, such as being cost-effective for the employer and the simplicity of the business relationship. On the other hand, it’s also beneficial for contractors, who have more freedom to organize their work and choose where they want to work from.

When starting as a foreign independent contractor, you need to ensure that:

  1. According to your contract, you are truly a contractor and not an employee
  2. The contract is compliant with the local labor law (depending on where the work is performed)

If you’re not sure whether you should be an employee or an independent contractor, consider the way you work.

Does your employer control your schedule, how you work, when, and where? If so, you should have employee status. If they only have control over the results of your work, you’re an independent contractor.

However, not all cases are as straightforward, so this 20-factor test may help you determine your status for sure.


Tax documents

Automate your tax document collection

From collecting tax forms to storing them all in one place, we automate everything, so you can stay focused on growing your business.

Learn more

Do you need to pay US taxes as a foreign independent contractor?

Even if you’re a foreigner, your income may still be taxable in the US. There are three possible scenarios:

You work in the US, but your country has a tax treaty with the US

If you perform work in the US because you have a working visa, but you’re not a US citizen, you may be exempt from US taxes or need to pay it at a reduced rate.

This is true if your country has a tax treaty with the US. In that case, you need to fill in Form 8233 - Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.

This applies to certain items of your income received from sources within the States. If you’re not sure whether your country has a treaty with the US, you can check the list on the official IRS website.

You work in the US, and there’s no tax treaty between your country and the US

If there isn’t a tax treaty between the US and your country, the employer needs to withhold from your payment the full amount of income tax for non-residents, which is 30%.

If there’s any part of the service done in the US, you need to meet these conditions if you want to avoid tax obligations.

  • You haven’t spent more than 90 days in a tax year in the US
  • You have made $3,000 or less
  • You have performed services for an office or entity maintained in a foreign country

Are you unsure whether the income is US-sourced? The IRS says you determine the source of income by determining the location the services are performed at. That means you don’t earn US-sourced income if you’re located in your country or anywhere outside the US while performing work, despite working for a US-based company.

In cases like that, the US employer isn’t in obligation to withhold any taxes from your income or report it.

Note that for any US-sourced income you need to get Form 1099-NEC from your employer so you can report your earnings appropriately.

You live and perform all the work in your country

Form W-8BEN is used for foreign individuals that perform work outside the US. In this case, your income isn’t taxable in the US, and you’re responsible for paying your own taxes in your country.

The purpose of these forms is to prove that you aren’t a US citizen. When working with foreign contractors, it’s critical that the employer collects this form since it protects them if the information you provide is for any reason false or incomplete. That’s why it’s vital to fill in the form accurately.

In case you’re acting as a business entity, you’ll receive Form W-8BEN-E from your employer. This form has the same purpose as W-8BEN and is also used for individuals who are self-employed.

One form is valid for three years and you need to submit a new one if any of the information changes or your collaboration with the employer continues for longer than three years.

Is your contract compliant with the local labor law?

Your employer needs to ensure that your contract complies with your local labor law, too. To avoid employee misclassification and potential penalties and legal issues, they must take local compliance into account, so be sure to check that when signing your contract.

If you want to learn more about working as a foreign independent contractor, check out this article.

Disclaimer: This article serves for informational purposes only and is not intended as tax advice. IRS regulations can be subject to change, so before you submit the forms, please check for the newest updates on www.irs.gov. We also advise you to consult an official tax advisor before taking any action.