In some cases, there is a thin line between a contractor and an employee. We already published the complete guide on deciding whether the worker is an independent contractor or an employee, and now we are taking it a step further.
Your business might be concerned about its contractor's status if:
- The company controls when and how the contractor works
- The contractor has been working for you a long time
- The contractor is working for you full-time
- The contractor doesn't have other clients
- The contractor is an integral part of your team (i.e., a part of the sales team)
What should be taken into account when hiring foreign employees?
Tax withholding
When your company considers hiring its service providers as employees, you should be aware of different tax withholding and reporting rules. It would be best if you took both the US (assuming your company is in the US) and the local country of your service provider into the equation.
If the soon-to-become employee provides services that are outside of the US, you are not required to withhold any taxes. When that is not the case, you should withhold the foreign contractor's income tax at the same rate as US residents. You should also include Social Security and Medicare tax. The tax withholding can be reduced or exempt if the employee's country has a tax treaty with the US, and they claim this exemption through the Form 8233.
Permanent establishment in the foreign country
A permanent establishment of the company means that the business has stable and ongoing activities that result in locally created income. In some countries, having employees, particularly ones engaging in sales activities, is considered as sufficient grounds for the permanent establishment.
Each country has its regulations when it comes to a permanent establishment, with some countries more strict than others. You should seek counsel from local tax specialists before hiring employees in a foreign country.
