What Are Tax Responsibilities of a Company Hiring Foreign Contractors?

Hiring foreign contractors? Learn all you need to know about your tax responsibilities when hiring from the global talent pool.

Written by Anja Simic
September 28, 2021

What Are Tax Responsibilities of a Company Hiring Foreign Contractors?

Hiring foreign contractors? Learn all you need to know about your tax responsibilities when hiring from the global talent pool.

Written by Anja Simic
September 28, 2021

What Are Tax Responsibilities of a Company Hiring Foreign Contractors?

Hiring foreign contractors? Learn all you need to know about your tax responsibilities when hiring from the global talent pool.

What Are Tax Responsibilities of a Company Hiring Foreign Contractors?

Hiring foreign contractors? Learn all you need to know about your tax responsibilities when hiring from the global talent pool.

Companies worldwide have realized the benefits of hiring remotely, and are browsing through the global talent pool. However, benefits come with obligations and duties. Tax forms are one of the most important ones to make your hires legal, although they may be confusing sometimes.

If your business is hiring independent contractors and freelancers, you may be wondering what your tax responsibilities are and what tax forms you’ll need to file for your new contractor.

This article will walk you through all the legal implications you need to be aware of and the types of taxes you have to pay.

Quick links:

Hiring an independent Contractor

There are plenty of upsides that both companies and independent contractors can experience from this type of professional relationship, so it’s no wonder that it’s so widely spread.

Independent contractors have fewer obligations towards the employer compared to regular employees as they’re considered self-employed. The employer can usually control the result of an independent contractor’s work, but not how the work will be done.

Does the employer pay taxes for an independent contractor?

No. The employer doesn’t have a legal obligation to pay the payroll taxes, or any other income taxes for an independent contractor.

As an independent contractor is practically self-employed, they need to report their income themselves and pay their own taxes. Also, the employer doesn’t need to withhold anything from the payments they make to an independent contractor.

What documentation does the employer need for an independent contractor?

The paperwork necessary for hiring an independent contractor isn’t too extensive. However, to protect themselves, companies may want to draft the contract carefully. The work of the independent contractor doesn’t automatically belong to the employer, unlike the work of a full-time employee.

If you’ve decided to hire a foreign independent contractor, you will need the IRS Form W-8BEN.

It’s proof that the person you’re hiring isn’t a US citizen, but really a foreigner, and it confirms that they’re receiving income from your company, which is located in the US. The form consists of three parts:

  • Identification of Beneficial Owner: This part contains personal information, such as name, address, taxpayer identification number, etc.
  • Claim of Tax Treaty Benefits: In case the US has a treaty with the country the contractor comes from, they need to pay income tax in their own country, and not the US. This part practically helps the contractor avoid paying double income taxes.
  • Certification and Signature: Before the contractor signs and dates the form, they review the provided information to confirm it’s accurate.

Note that W-8BEN form is for individuals only. If an independent contractor is working with a US company as a business entity, you need to fill in the W-8BEN-E form.

Also, as the employer, you don’t submit this tax form to the IRS. You keep it at your premises as long as it’s filled in and signed by the independent contractor.

When Do You Need the Form 1099-NEC?

If they’ve made more than $600 within one fiscal year and from a single client, US-based independent contractors fill in the Form 1099-NEC form when performing work for US-based companies. Reminder: if you hire foreign contractors, located outside the US, they’ll need the Form W-8BEN.

However, there’s a case where you may need the 1099 form for your foreign contractor. If they’re a US citizen, but work abroad, and perform their work remotely or some of the work is done in the US, they’ll need the 1099-NEC form if your payments to them exceeds $600 per fiscal year.

Note: Before 2020 tax reporting, non-employee compensation was reported within 1099-MISC form.

Study the Local Law

Tax regulations vary by country, as well as labor law. That’s why it’s critical to thoroughly research law regulations regarding hiring contractors. In some cases, you may find it difficult to match the role of the contractor with a setup available in their country.

Employee misclassification can cause serious trouble for a company and may even end with lawsuits, so ensure you have proper legal counsel to help you define your working relationship with the contractor.

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

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Companies worldwide have realized the benefits of hiring remotely, and are browsing through the global talent pool. However, benefits come with obligations and duties. Tax forms are one of the most important ones to make your hires legal, although they may be confusing sometimes.

If your business is hiring independent contractors and freelancers, you may be wondering what your tax responsibilities are and what tax forms you’ll need to file for your new contractor.

This article will walk you through all the legal implications you need to be aware of and the types of taxes you have to pay.

Quick links:

Hiring an independent Contractor

There are plenty of upsides that both companies and independent contractors can experience from this type of professional relationship, so it’s no wonder that it’s so widely spread.

Independent contractors have fewer obligations towards the employer compared to regular employees as they’re considered self-employed. The employer can usually control the result of an independent contractor’s work, but not how the work will be done.

Does the employer pay taxes for an independent contractor?

No. The employer doesn’t have a legal obligation to pay the payroll taxes, or any other income taxes for an independent contractor.

As an independent contractor is practically self-employed, they need to report their income themselves and pay their own taxes. Also, the employer doesn’t need to withhold anything from the payments they make to an independent contractor.

What documentation does the employer need for an independent contractor?

The paperwork necessary for hiring an independent contractor isn’t too extensive. However, to protect themselves, companies may want to draft the contract carefully. The work of the independent contractor doesn’t automatically belong to the employer, unlike the work of a full-time employee.

If you’ve decided to hire a foreign independent contractor, you will need the IRS Form W-8BEN.

It’s proof that the person you’re hiring isn’t a US citizen, but really a foreigner, and it confirms that they’re receiving income from your company, which is located in the US. The form consists of three parts:

  • Identification of Beneficial Owner: This part contains personal information, such as name, address, taxpayer identification number, etc.
  • Claim of Tax Treaty Benefits: In case the US has a treaty with the country the contractor comes from, they need to pay income tax in their own country, and not the US. This part practically helps the contractor avoid paying double income taxes.
  • Certification and Signature: Before the contractor signs and dates the form, they review the provided information to confirm it’s accurate.

Note that W-8BEN form is for individuals only. If an independent contractor is working with a US company as a business entity, you need to fill in the W-8BEN-E form.

Also, as the employer, you don’t submit this tax form to the IRS. You keep it at your premises as long as it’s filled in and signed by the independent contractor.

When Do You Need the Form 1099-NEC?

If they’ve made more than $600 within one fiscal year and from a single client, US-based independent contractors fill in the Form 1099-NEC form when performing work for US-based companies. Reminder: if you hire foreign contractors, located outside the US, they’ll need the Form W-8BEN.

However, there’s a case where you may need the 1099 form for your foreign contractor. If they’re a US citizen, but work abroad, and perform their work remotely or some of the work is done in the US, they’ll need the 1099-NEC form if your payments to them exceeds $600 per fiscal year.

Note: Before 2020 tax reporting, non-employee compensation was reported within 1099-MISC form.

Study the Local Law

Tax regulations vary by country, as well as labor law. That’s why it’s critical to thoroughly research law regulations regarding hiring contractors. In some cases, you may find it difficult to match the role of the contractor with a setup available in their country.

Employee misclassification can cause serious trouble for a company and may even end with lawsuits, so ensure you have proper legal counsel to help you define your working relationship with the contractor.

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