Why would you hire offshore?
One of the beauties of working with either a fully remote team or using remote workers to support your operations is that a world of opportunity can literally open up in front of you.
Now especially, as we re-adjust and adapt our working practices to accommodate complications caused by the pandemic, remote working is becoming more the norm.
These new opportunities to expand your talent pool to international workers can offer a number of great benefits to your business, such as:
- Savings on the cost per employee
- Reduced office and supplies costs
- Access to global talent
- Staffing flexibility
- Little or no training expenses required
- A higher level of efficiency
- Reduced exposure to lawsuits
- Ending the working relationship is easier
However, while many businesses are looking to employ independent contractors and workers overseas, they are rarely aware of the legal consequences of a cross-border relationship. The last thing you want to get hit with is a tax evasion charge or a heavy IRS audit!
There are two ways in which this might happen. That is by flouting local laws or not categorizing your workers correctly.
Employee vs independent contractor, what’s the difference?
For most businesses, this is going to be the real question when it comes to hiring offshore help and ensuring that all of your tax obligations are in order.
What is an independent contractor?
The IRS defines an individual as an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
However, this is only how the status is classified in the US, and each country will have its own specific definition. This is an especially important consideration for overseas contractors and their ability to understand local obligations.
Generally speaking, Independent contractors are individuals specializing in particular services that are offered to clients. Sometimes referred to as freelancers, or 1099 contractors, they are often self-employed owners of a small business that a client can hire for either a per-project basis or a set period of time.
The degree of control an employer has over the independent contractor is one of the main factors that determine their relationship. Set working hours and specific activities can be just two of the factors that might imply the relationship can be viewed as employment.
What is an employee?
If the employing company controls the performance of your services, the individual will be considered an employee. This is because the relationship is determined by the level of control and independence the employee has in their job.
Additional factors can include whether expenses are reimbursed, whether tools and materials are supplied for the contracted services, if paid vacations are offered, and whether the work performed is a key aspect of the business.
When an employment contract is already in place, the worker’s status may be evident, but an independent contractor can still begin to resemble an employee in some circumstances.
Determining the status of an employee or independent contractor
Determining whether you are hiring individuals as an employee or independent contractor is not as straightforward as you might have thought, or definitely hoped! If it’s any consolation, the IRS seems to think so too, which is why they employ what is called a “Reasonable Basis Test”. Made up of 20 questions, you will be able to make a better assessment of what employee status your team will require and what the consequential tax obligations will be. Simply put, if there are more ticks in the yes than no boxes, the chances are they should be considered an employee, and not an offshore contractor.
If you are still unsure, it is advisable to complete an SS-8 form which is the Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and send it to the IRS.
Creating a contract for an independent contractor
Once you have correctly determined the exact status of our offshore contractor as independent, you can begin putting the contract, which will be substantial! The written contract will protect both you and the contractor from any potential confusion and ensure both parties are aware of their responsibilities.
It is important to note that these contracts will require a lot of specific wording that considers the local labor law regulations, so we would not recommend relying on a template. The contract must include:
- A detailed scope of work.
- Establish each party’s liability, their status, and the relationship.
- Include an indemnification clause – compensation for harm or loss.
- Establish ownership of work, recognizing that some countries have specific policies.
- A confidentiality and data protection clause
- A termination and notice clause.
- Governing law appoints the legal body responsible for disputes resolution.
If you require help creating a contract, don’t hesitate to contact our expert team.
Income and tax responsibilities
Companies hiring independent contractors usually have no obligation to pay payroll taxes because the independent contractor is responsible for their own taxes.
The company should still be aware of its responsibility to compile and report the total compensation using the appropriate tax slips. This will depend on the contractor’s country of residence as some have specific laws regarding this.
As the independent contractor is living and working outside of the US, the US-based company does not need to report the payments to the IRS. Neither does it need to withhold taxes, but it must collect W-8BEN(E) as proof of the contractor’s status.
US citizens living abroad and working as independent contractors
As a general rule, the IRS will consider an independent contractor as a US citizen even if the service is being performed offshore. This is regardless of how much time they have spent abroad and whether they are considered a tax resident of another country.
The employing company will need to issue a Form 1099-NEC if the contractor has received more than $600 in a year.
In some instances the tax obligations can vary, so we strongly recommend that you check IRS Publication 54.
Lloyd & Hodge is available from wherever you are to help answer any question you may have regarding hiring offshore contractors, and our expert team is ready to set your business up to take advantage of a worldwide pool of talent.
Contact us today to find out more.