Nonprofit organizations are expanding globally with more and more frequency. Foreign activity often starts with one or two events carried out using a local person in the foreign country. The local person is hired on a short term basis and treated as an independent contractor for US tax purposes. But for tax reporting purposes, foreign activities usually have two aspects to consider: both US and foreign location rules and regulations. The hiring of an independent contractor overseas is no exception.
The US side of the tax reporting of an overseas contractor is relatively straightforward if:
- The worker is not a US citizen or resident alien,
- All of the work will occur in the foreign country,
- And the worker will not spend any time in the US.
In this scenario, the organization must have the worker document citizenship and residence by completing Form W-8BEN, which should be kept on file, similar to a W-9. The foreign worker does not need a SSN, EIN, or ITIN in order to complete the form. A foreign citizen, who earns US source income, may be subject to nonresident alien (NRA) withholding, which varies according the type of income and any applicable treaty rates. But payment for personal services is sourced according to where the work is performed. If all of the work is done overseas, then the income is foreign sourced, which is not taxable by the US, and NRA withholding is not required. There is no further tax reporting required.
The foreign side of the transaction may not be quite so straightforward. Just as in the US, the first thing to consider is the local definition of an independent contractor. In the US, the IRS considers a list of 20 factors in determining if a worker is an independent contractor or a de facto employee. The same is true overseas, where each country has its own set of labor laws designed to protect local workers.
When considering hiring an overseas independent contractor, always get advice on the specific criteria for an independent worker in the foreign country. Consider using a professional firm that specializes in contracting local workers. Confirm that the firm will handle all of the local paperwork for the worker, and not act merely as a paying agent.
Always have the parameters of the job documented in an employment agreement. The agreement should be kept on file with the signed Form W-8BEN. This agreement may help protect your organization if the status of the worker is questioned in an IRS audit. Employment agreements are actually required by law in some foreign countries. But an agreement alone, just as in the US, does not determine employment status. Local law in the foreign country and the fact pattern of each situation determine a worker’s status. For example, despite an employment agreement that may state otherwise, in Spain a self-employed worker is considered an employee with the special status of economically dependent independent contractor, even if they have only one client. Once they are deemed a de facto employee, they are eligible for health benefits, vacation, and severance — and the employer may be subject to fines.
How the worker will be paid presents another set of decisions. Some countries require the US organization to establish a local presence in some form or another; others require wages to be paid only through a local bank; while still others permit wires from the US directly to the worker’s bank account. For a short term project, a wire may be the most practical, despite the fees. Check early in the planning process to see if your current financial institution can wire funds to the foreign location involved. Additionally, corruption in some countries is high. Review unusual requests from local workers to pay the funds to a different country or to an account in a name other than the one provided on the Form W-8BEN.
In the long run, when considering hiring an independent contractor overseas, review the local laws and payment requirements early in the planning process in order to avoid fees, fines, and penalties of all denominations.