@ColleenB , while the information you found on the IRS site is correct, however, there a few things to note here:
(a) IRS has jurisdiction and therefore its rulings/ opinions etc. apply ONLY to entities in the USA. The employee definition that IRS uses/enforces assures compliance with FICA requirements and tax withholding rules. Thus as an employer, the entity is required to pay 50% of the FICA ( Social Security & Medicare ) , while employee bears the cost of the other 50%; is required to withhold federal and state personal income axes on "as earned " basis per paycheck.
(b) Foreign entities operate in compliance with local tax laws and definitions thereof. They generally are not obligated to withhold US taxes, share FICA costs etc. Thus while you may be an employee ( under US Tax laws), for US Tax Purposes, neither the FICA nor the tax withholding ( Federal and State) are affected. Many countries have totalization agreements with the USA , in order to ameliorate the FICA burden --- often you pay into one country and this is given credit and/or adjusted in the other country. The double taxation , again based on tax treaties between US and most countries, allows for exclusion of certain wages & self-employment earnings from US taxes upto a maximum and anything beyond this exclusion limit is taxed by both countries and US gives foreign tax credit in order to ameliorate the effects of double taxation.
Therefore , my conclusion is that whether you are treated as an employee or contractor under the local laws is immaterial for US tax purposes. Your worldwide earnings are still taxable income subject to tax treaty conditions and foreign earned income exclusion plus foreign tax credit rules and regulations.
Does this help and/or is there more I can do for you ?
pk
