The 10,000 foot view of IC tax requirements
If you've only ever worked as an employee, it can be difficult to understand your tax obligations as a contractor. Since you are responsible for paying your own taxes as a self-employed individual, you must familiarize yourself with the various tax laws of both your home country and the country in which your work is performed. As an independent contractor you will be responsible for reporting and paying your own income tax, as well as a self-employment tax in some cases.
For businesses working with independent contractors, especially those located in countries foreign to their own, the tax requirements can be equally confusing. Knowing which forms to submit and which taxes your organization is expected to pay presents a challenge for any business but especially for those that are small and moving quickly. This article will help give you a better sense of how to make sure all your ducks are in a row when thinking about independent contractors and taxes.
Where should I pay taxes as an independent contractor?
Regulations surrounding taxation for international contractors vary depending on the countries involved. Included below are a few example situations for foreign contractors employed by American companies:
1) Contractors that live and perform all of their work abroad
Foreign contractors that do not live or work in the United States are responsible for paying all taxation to their own government as their income is not taxable in the United States.
At the beginning of your working relationship with a customer, you will be asked to complete Form W-8BEN, which simply registers with the United States government that you are not an American citizen.
2) Contractors whose home nation has a tax treaty with the United States
Foreign contractors who live and work in the United States, but whose home nation has a tax treaty with the United States may have little to no tax obligations to the American government.
In cases such as these, contractors may be required to pay some of their taxable income in the United States depending on the tax treaty established between the two nations and the individual’s source or sources of income while working in the United States.
3) Contractors whose home nation has no tax treaty with the United States
Contractors that live and work in the United States and whose home countries have no tax treaty with the US government can face significant tax withholdings if the following conditions are not met:
- The contractor has spent less than 90 days in the US in one tax year
- The contractor has made less than $3,000 total in the United States
- The contractor has provided services to an entity located abroad
If none of these conditions apply, the organization that hired the contractor is expected to withhold 30% of all taxable income paid to the contractor.
Make sure your contracts are classified appropriately
A crucial element to making sure both independent contractors and the organizations they work with are able to meet their tax obligations is ensuring that any agreement signed between them is fully compliant with local regulations.
Before signing a contractor agreement, both parties should make sure they fully understand all relevant laws and regulations in the country where the work will be performed and that the agreement adheres to all relevant legislation.
Tax pro-tips for ICs
Given that the taxation requirements surrounding independent contractors can be stringent, we have a few tips and tricks for you or your business to consider when hiring contractors:
1) Find a tax professional to help
If you don't feel like doing your taxes by yourself, think about hiring a professional. Many tax professionals specialize in small business taxes or international tax requirements. Accountants that specialize in your particular issue or industry can help you save hundreds or even thousands of dollars in tax deductions and time spent preparing tax forms.
2) Maintain clear and organized records
One of the most effective ways to decrease your stress come tax season is to ensure your business transactions and/or contractor income is organized, accurate, and efficiently tracked. Individuals that have complete control of their records experience less headaches when the time comes to pay their taxes.
From expense management platforms to accounting software tools, there has never been better technology for keeping your records organized than in today’s digital age.
3) Be aware of potential tax benefits
One of the lesser known benefits of working as an independent contractor is that some locales permit individuals working as contractors to receive tax deductions for relevant business expenses. In many states in the US, for example, independent contractors can deduct costs associated with health insurance, home office design, bank fees, and travel from their taxable income. Be sure to do your homework on what you can deduct as these savings can really add up.
About Borderless
Borderless is a global company of passionate people brought together by the conviction that hiring local talent anywhere in the world can be the greatest form of opportunity equalization.
Organizations that choose to look beyond their brick-and-mortar offices will not only have access to a wider talent pool of highly qualified individuals, but will also be supporting emerging local economies, improving their workforce diversity, and contributing to emission reduction by removing the daily commute. All while increasing their bottom line and reducing their legal liability.
Borderless enables you to become a distributed organization whose members will be empowered to lead the lifestyle they desire without sacrificing their career opportunities or feeling like 2nd class citizens.
Disclaimer
Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
