What tax form do I send the foreign contractors who I outsource work to?

[druss2244]

I own a one-man LLC (sole proprietorship) website development company, and I outsource some of the work to web developers living and working outside of the US.

I'm guessing since my company is based in the US and my clients are based in the US, this would be considered US sourced income and the foreign contractors would need to pay US taxes? If so, what form would I send to them if a form is needed?

Any help would be appreciated. Thanks!

[Vanessa A]

You would file form 1042-S with the IRS and also give a copy to the foreign contractor.

If you are making payments to foreign contractors you would actually need to withhold 30% of their pay when payment is made. This rate could be different if the foreign person is a resident of a country the US has a tax treaty with. 

If you did not make the withholdings and the foreign contractor does not file a return and make the payments you could end up being personally liable for the withholdings. 

TurboTax does not support the 1042-S. It would be a good idea to contact a local tax professional that is familiar with foreign tax withholdings and treaties. 

US Withholding for NRA

[Opus 17]

See question and answer 4 in section 1 here.

https://www.irs.gov/businesses/international-businesses/us-withholding-agent-frequently-asked-questi...

Also see this table.

https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-source-of-income

Even though you and your clients are based in the US, if your subcontractors are non-resident aliens and perform their services entirely outside the US, your payments to them are not US-sourced income.  What matters is the location where the income is earned -- in this case, where the coding is actually done.

If you did issue a 1042-S and did withhold taxes, they will file a 1040-NR to claim zero US-source wages and claim a refund of the withheld taxes.  It seems unnecessary to put your subs through this process.