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My friend in USA who is a US citizen wants to hire her cousin from her native country and will be paying the relative as independent contractor.

Dilemma:

  1. She does not have a registered business under her name. She's only working as a freelancer and giving her relative the cut when she seeks help.

  2. Does IRS like one payment method over other or they simply don't care as long as she can show the receipts?

  3. It's only consulting work at the moment, so most of the communication is done over phone. Should they start engaging in written communication to keep records of the work done?

  4. Is it okay to pay in one go to save money-transferring fees? Can she pay in advance?

Basically, she has not outsourced work in previous years, and she wants to avoid any red flags.

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Generally for tax questions you should talk to a tax adviser. Don't consider anything I write here as a tax advice, and the answer was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

Does IRS like one payment method over other or they simply don't care as long as she can show the receipts?

They don't care as long as she withholds the taxes (30%, unless specific arrangements are made for otherwise). She should withhold 30% of the payment and send it to the IRS. The recipient should claim refund, if the actual tax liability is lower.

It's only consulting work at the moment, so most of the communication is done over phone. Should they start engaging in written communication to keep records of the work done?

Yes, if she wants it to be a business expense.

Is it okay to pay in one go to save money-transferring fees? Can she pay in advance?

Again, she can do whatever she wants, but if she wants to account for it on her tax returns she should do it the same way she would pay any other vendor in her business. She cannot use different accounting methods for different vendors.

Basically, she has not outsourced work in previous years, and she wants to avoid any red flags.

Then she should start by calling on her tax adviser, and not an anonymous Internet forum.

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  • The title contains "offshoring work" .. presumably "offshoring" means the worker is foreign / located outside of the U.S., and not likely a U.S. citizen (though we don't know for sure). Withholdings not likely an issue?
    – Chris W. Rea
    Aug 24, 2012 at 18:36
  • @ChrisW.Rea on the contrary - withholdings are very likely the issue. Transactions between US persons are taxed through the US persons' voluntary disclosure. Its the transactions with foreigners when the withholdings are required, because that's the only way for the IRS to tax foreigners on their US income.
    – littleadv
    Aug 24, 2012 at 18:42
  • Wouldn't a foreigner need to be somehow deemed a U.S resident in order to be liable for income tax? Would it differ if it were two businesses as opposed to two individuals? This just seems odd. (Then again, I'm Canadian.) If I contracted to an offshore development shop, I wouldn't need to withhold tax for them .. they would be taxable in their own jurisdiction.
    – Chris W. Rea
    Aug 25, 2012 at 0:17
  • @ChrisW.Rea no. US taxes on all income sourced in the US. Non-residents pay only tax on that income to Uncle Sam (residents pay taxes on worldwide income, not only US-Sourced). It wouldn't make any difference if it was two businesses. If you contracted to an offshore development shop, you would indeed need to withhold tax for them, and they would have to claim refund from the IRS (including using treaty or foreign tax credit adjustments).
    – littleadv
    Aug 25, 2012 at 0:27
  • @ChrisW.Rea to avoid/mitigate that, the foreign individual/entity must fill W8BEN form and give it to the payer, in which they will declare what should be withheld (if not the default 30%), and based on what legal authority (usually a tax treaty).
    – littleadv
    Aug 25, 2012 at 0:29

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