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Withholding Tax for Payment to Outsourcers?

by markhere
9 replies
Hello Guys,

I read on IRS that you have to withhold 30% flat tax for payment to independent contractors (outsourcers) outside USA for amounts greater than $600 annually.

Is that correct? Can anyone confirm this? Do you withhold tax?
#outsourcers #payment #tax #withholding
  • Profile picture of the author JOSourcing
    Banned
    Different countries enforce different tax laws for different entities, which can make offshoring a royal pain in the neck. Can you please link to the document you found at the IRS site?
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    • Profile picture of the author markhere
      Originally Posted by JOSourcing View Post

      Different countries enforce different tax laws for different entities, which can make offshoring a royal pain in the neck. Can you please link to the document you found at the IRS site?
      Here is the article I'm referring to : ***.irs.gov/businesses/small/international/article/0,,id=104997,00.html

      Please replace *** with www
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      • Profile picture of the author JOSourcing
        Banned
        Originally Posted by markhere View Post

        Here is the article I'm referring to : ***.irs.gov/businesses/small/international/article/0,,id=104997,00.html

        Please replace *** with www
        Awesome. Thanks for the link! Since your contractor is outside the U.S., NRA withholding isn't applicable. It's only relevant when you've hired a non-resident alien who's temporarily living in the U.S. But since I have to call the IRS for some other research, I'll verify this and report my findings later.
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  • Profile picture of the author Janet Sawyer
    An important line at the beginning of the page states this.

    A reduced rate, including exemption, may apply if an Internal Revenue Code Section provides for a lower rate, or there is a tax treaty between the foreign person's country of residence and the United States.
    So it would be best to check if there is a tax treaty with the country of the outsourcer.
    You can do this by going to this page here : United States Income Tax Treaties - A to Z

    An example, if your outsourcer is from the UK, the USA and the UK do have a tax treaty and the outsourcer would pay tax to the UK Government, the USA Government would not expect the outsourcer to pay Double Taxation.

    Of course the best advice would be to discuss this with a) an accountant and b) a lawyer specialising in contract law.

    Any advice given by me is my own interpretation of the rules, and sometimes, I can be wrong!
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  • Profile picture of the author GMD
    Banned
    Originally Posted by markhere View Post

    Hello Guys,

    I read on IRS that you have to withhold 30% flat tax for payment to independent contractors (outsourcers) outside USA for amounts greater than $600 annually.

    Is that correct? Can anyone confirm this? Do you withhold tax?
    You don't withhold any taxes in this situation. You have to first understand what an "independent contractor" is: the independent contractor(s) is/are responsible for paying their own taxes.

    As a person or business using the services of an independent contractor your job is to 1) advise them per current tax law that you are NOT responsible for withholding or paying any of their taxes, 2) they are responsible for reporting any income and making the appropriate tax contributions to their various tax agencies, and 3) paying them their fee for services rendered/product(s) received.

    The reason why so many U.S. companies and individuals "hire" contractors is because it is cheaper than making them an "employee": there's no unemployment tax to pay, Social Security contributions to make, insurance payments, etc. It's a straight "fee-for-hire" scheme where services and products are exchanged and the person getting paid is responsible for his or her own taxes.
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    • Profile picture of the author markhere
      Originally Posted by JOSourcing View Post

      Awesome. Thanks for the link! Since your contractor is outside the U.S., NRA withholding isn't applicable. It's only relevant when you've hired a non-resident alien who's temporarily living in the U.S. But since I have to call the IRS for some other research, I'll verify this and report my findings later.
      Yes please do post the findings..

      Originally Posted by GMD View Post

      You don't withhold any taxes in this situation. You have to first understand what an "independent contractor" is: the independent contractor(s) is/are responsible for paying their own taxes.

      As a person or business using the services of an independent contractor your job is to 1) advise them per current tax law that you are NOT responsible for withholding or paying any of their taxes, 2) they are responsible for reporting any income and making the appropriate tax contributions to their various tax agencies, and 3) paying them their fee for services rendered/product(s) received.

      The reason why so many U.S. companies and individuals "hire" contractors is because it is cheaper than making them an "employee": there's no unemployment tax to pay, Social Security contributions to make, insurance payments, etc. It's a straight "fee-for-hire" scheme where services and products are exchanged and the person getting paid is responsible for his or her own taxes.
      That's what I thought too! Until I read the article from IRS.

      "Generally, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%"

      "Payments to all foreign persons, including nonresident alien individuals, foreign entities and governments, may be subject to NRA withholding"
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  • Profile picture of the author Rob Howard
    This only applies to foreign persons working on American soil. (if the service is performed in the United States)

    If they are working in their home country, as an outsourcer, then there is no withholding.

    I know because I had a team of 12 overseas and just dealt with this all.

    Rob
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    • Profile picture of the author markhere
      Originally Posted by ccmusicman View Post

      This only applies to foreign persons working on American soil. (if the service is performed in the United States)

      If they are working in their home country, as an outsourcer, then there is no withholding.

      I know because I had a team of 12 overseas and just dealt with this all.

      Rob
      Oh great! Thanks for the confirmation
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    • Profile picture of the author GMD
      Banned
      Originally Posted by ccmusicman View Post

      This only applies to foreign persons working on American soil. (if the service is performed in the United States)

      If they are working in their home country, as an outsourcer, then there is no withholding.

      I know because I had a team of 12 overseas and just dealt with this all.

      Rob
      This is exactly 100% true.

      When reading any IRS publications, you really have to read it and understand it. What you've quoted IS for foreign persons working within the confines of the United States. And sure, ANYBODY working within America has to report/pay their taxes (as well as probably report their earnings to their country of residence).

      Again, for your situation, there's not a thing that you need to worry about!
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