Is a US based company required to withhold and pay any taxes on behalf of hired foreign independent contractors?

A business is required to report payment of over $600 annually on Form 1099 if it hires an independent contractor in the US. If US based companies hire a foreign independent contractor there is no requirement for them to file an IRS 1099 Form to pay a foreign contractor. However, they are required to withhold and pay taxes in the US depending whether the independent contractor income is US-sourced or not. According to the IRS, the source of income paid to independent contractors is determined by the location where the contractors perform the service. In other words, the independent contractor’s location determines where their income officially comes from, not the location of the company.

To conclude, even if a foreign independent contractor works for a US company, the income payed to the contractor is not US-sourced as long as every aspect of the service is performed outside of the U.S. In this case, the US company is not required to withhold or report any taxes. 

However, if a foreign contractor performs services in the US then certain conditions must be met to avoid tax obligations. Those conditions are: 

• The contractor was present in the US for no more than 90 days in a tax year.

• The payment to the contractor is less than $3,000.

• The payment to the contractor is for services performed for an entity or office maintained in a foreign country.

If any of the above conditions are not met, a US company will need to report and withhold income of the foreign independent contractor. However, withholding the income tax for a contractor can be avoided if the country of the contractor has a tax treaty with the US. 

US companies should take the below mentioned steps when paying foreign contractors in order to stay in compliance with the US tax laws: 

• Have a written contractor agreement in place. A written agreement with a foreign contractor is an important step to specify terms of this unique work relationship. The agreement should clearly state the scope of services and compensation. The agreement should establish a contractor status by showing independence and a lack of control in how a contractor performs the work. 

• Have an IRS form W-8BEN (or W-8BEN-E for contractor companies) completed by the contractor. The equivalent of Form W-9 for foreign contractors is the IRS Form W-8BEN. There are two variations: Form W-8BEN for individuals and Form W-8BEN-E for foreign companies. These forms certify that a person (or entity) is not, in fact, a US citizen. If you do not collect form W-8BEN from your contractor, you are obligated to withhold a 30% income tax from their pay. Every US company should have their foreign contractors complete this form. These forms are valid for three years. They must be renewed if the working relationship continues longer than that.