Hiring Foreign Contractors - Is This Tax Deductible?

Question

I have a small start-up business in the US and I'm going through freelance sites like freelancer.com to get some work done. The appeal of this is that the rates for foreign contractors is often less than US contractors, but even so I'm riding the income/expense line pretty closely.

I believe if they were US based contractors I would need to send them a form to do my own deduction. But they are foreign workers and I don't believe they care enough about the US tax system or myself to go through that processes- why would they?

Is there a foreign worker form I should be using?

If the foreign worker does not submit the form, can I still deduct their services?

Would I be in big trouble if I just deducted these expenses without sending any forms out?

Answer 1

Your premise is incorrect:

I believe if they were US based contractors I would need to send them a form to do my own deduction.

If it is a legitimate business expense, you can deduct it regardless of whether or not they are US or foreign workers.

You only need to send the 1099 form to the IRS and US workers (or foreigners performing work in the US) that you contract directly and if the total amount you paid them during the tax year is greater than $600. If the "worker" you use is a corporation then you do not need to provide a 1099. You should send all US based service providers that you pay more than $600/year a W9 form and based on how they fill it out you can determine whether or not you will need to file a 1099 form for their work.

Answer 2

If you want to be extra sure, get them to sign a W8-BEN form and keep it on file. I have talked to the IRS about this, and they agreed it's generally unnecessary when dealing with a corporation but interpretations may vary.

It is a certification by the foreign supplier that:

Otherwise, conceivably, you could be dinged for withholding tax. It should be a deductible business expense in any case (assuming it is for an allowable business purpose of course). If the country in which they are located has no tax treaty with the US you may have a more complex situation and should probably talk to your accountant. The company you are paying as a middleman is another complexity- but at least you can ask them. I suspect their official position is that you are dealing with the supplier directly and they are merely holding payments in escrow and thus have no responsibility for withholding tax.

They should have no problem with signing the form if they have no connection to the US. If they do have a connection, it gets more complicated. Personally, I stopped dealing with an Asian supplier who had too close a connection to my country (Canada) because we were getting double taxed, which made more work for the bookkeepers to get the money back.