paid overseas(India) contractors

Forum|Forum|3 years ago
November 22, 2022
5 replies
72 views

I paid overseas(India) contractors, how do income tax treaties work?

I am self-employed in the US. I have paid overseas contractors/freelancers and they are citizens of India and are located outside the US, so neither contractor would count as a US Person.

Questions are:

1. Am I required to withhold any taxes for either contractor?

2. Are the payments deductible in full as business expenses?

3. I understand that I need to file W-8BEN forms for these contractors. Do these need to be attached to my tax return, or are they filed in some other way?

4. How does the income tax treaty affect this?

5. What other forms that needs to be filled out during my tax return filling?

Not A Product Question

Best answer by pk_

@taxpayer2005, assuming that you are US person ( citizen / Green Card / Resident for tax purposes ) and you report your self-employed/ sole proprietor business on Schedule-C ( dis-regarded entity for tax purposes ),: 1. you are not required to withhold any taxes ( Fed, FICA, state etc. ) for and on-behalf of your contractors ---- this assumes that these "subs" are actual contractors-- whether actual persons or entities. You give a task, they perform with no "overseeing" from you -- thus fulfilling a contractor- contractee relationship. 2. You report contractor expenses on line 11 of Schedule-C --- see intsructions for Schedule-C here -->https://www.irs.gov/pub/irs-pdf/i1040sc.pdf 3. You do NOT need to file W-8BEN , just because the entity/ contractor is foreign --- you need that information ( W-9) i.e. tax id for a contractor that is US person and/or the work is done in the US. If the contractor ( person / entity ) is a Non-Resident Alien and the work is performed abroad, then the contractor has no requirement to file US taxes and therefore there is no need for the W-9 or W-8BEN. Generally the tax treaty would require the income from such contracting activity ( performed in that other country ) to be taxed by the country where the entity/ person is resident / domiciled. 4. US-Other country tax treaties generally works on the basis of world income of the resident and income is sourced where the work is done. 5. As far as contractors -- if they are US person and the work is done in the USA then you need to issue 1099-NEC or W-2 depending on circumstances and relationship with the "performer" of the activity; for contractors where the work is done abroad, it is just a financial relationship --- you perform and I pay for the work -- no forms to the IRS except Schedule-C notation as an expense and back-up documentation of the work required and payment for therof. Does this answer your query ? Do you need more help ? pk

Level 15

Answer

Level 15

@taxpayer2005, assuming that you are US person ( citizen / Green Card / Resident for tax purposes ) and you report your self-employed/ sole proprietor business on Schedule-C ( dis-regarded entity for tax purposes ),: 1. you are not required to withhold any taxes ( Fed, FICA, state etc. ) for and on-behalf of your contractors ---- this assumes that these "subs" are actual contractors-- whether actual persons or entities. You give a task, they perform with no "overseeing" from you -- thus fulfilling a contractor- contractee relationship. 2. You report contractor expenses on line 11 of Schedule-C --- see intsructions for Schedule-C here -->https://www.irs.gov/pub/irs-pdf/i1040sc.pdf 3. You do NOT need to file W-8BEN , just because the entity/ contractor is foreign --- you need that information ( W-9) i.e. tax id for a contractor that is US person and/or the work is done in the US. If the contractor ( person / entity ) is a Non-Resident Alien and the work is performed abroad, then the contractor has no requirement to file US taxes and therefore there is no need for the W-9 or W-8BEN. Generally the tax treaty would require the income from such contracting activity ( performed in that other country ) to be taxed by the country where the entity/ person is resident / domiciled. 4. US-Other country tax treaties generally works on the basis of world income of the resident and income is sourced where the work is done. 5. As far as contractors -- if they are US person and the work is done in the USA then you need to issue 1099-NEC or W-2 depending on circumstances and relationship with the "performer" of the activity; for contractors where the work is done abroad, it is just a financial relationship --- you perform and I pay for the work -- no forms to the IRS except Schedule-C notation as an expense and back-up documentation of the work required and payment for therof. Does this answer your query ? Do you need more help ? pk

T

taxpayer2005Author

Level 2

Thank you so much for the detailed response @pk12_2 and @Anonymous_ . Appreciate it!! So based on the response, I am understanding that there may not be a need for additional forms to be submitted except for including/reporting expenses in Line 11 Schedule C. Is that right? Line 11 instruction states that I may need to fill out 1099-NEC or 1099-MISC, so in my case the contractor is foreign, so I may not need to do that. Please clarify. Regarding the proof of payment, Are bank statements sufficient for the transfer?

P

pk_

Level 15

"Line 11 instruction states that I may need to fill out 1099-NEC or 1099-MISC, so in my case the contractor is foreign, so I may not need to do that."

Perhaps I should have clarified --- the above is true ( i.e. you do not need to issue 1099-NEC or 1099-MISC ) if , and only if .

(a) the contractor ( person or entity ) is foreign and

(b) the work is performed abroad. In your case both conditions are satisfied --per your earlier post -- hence it is true.

Regarding records to withstand an audit ( in that rare case ), most business would have the following ---

1. work contract i.e. work to be accomplished signed by both the contractor and the contractee showing the specifics of the performance , the total price for the effort and payment schedule , how to pay ( bank deposit / wire transfer etc. );

(2) invoice by the performing person/ entity;

and

(3) payment evidence -- check / bank transfer etc. till the end of the year ( if the contract / work persists beyond the end of the tax year). This is no different than what you would do for an US based contractor -- the only wrinkle here being that it is a contract involving foreign worker/ work site / entity.

Does this make sense ?

Is there more I can do for you ?

pk