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I've seen this asked a few different ways (closest was here), but I am looking to find out from the business's perspective, how to report (if necessary) the amount paid to a foreign contractor.

My situation is as follows: I have a US LLC and am wanting to contract an agency in India that I have found via odesk.com. I know I'd have to file a 1099 for a US contractor working in the US, and I think the 1042(S) for a foreign contractor working in the US, but what if I have a foreign contractor working outside of the US? Would this fall in a box of the 1065? Should I file a 1099/1042(S)?

I'm sure there's a form for it; any help is greatly appreciated!

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    Aren't you paying to odesk? Or you're paying the contractor directly? – littleadv Jul 28 '14 at 20:58
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    Considering paying the contractor directly; that's what led me to this question! – Jon B Jul 28 '14 at 21:08
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I took littleadv's advice and talked to an accountant today. Regardless of method of payment, my US LLC does not have to withhold taxes or report the payment as payments to contractors (1099/1042(S)) to the IRS; it is simply a business expense.

He said this gets more complicated if the recipient is working in the US (regardless of nationality), but that is not my case

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    While the accountant may have more details than what you've provided here, as a general rule - this is incorrect. See here for more details and specific instructions: irs.gov/Businesses/Small-Businesses-&-Self-Employed/… I suggest you get that from the accountant in writing, so that you could defend yourself if needed with that advice. – littleadv Jul 30 '14 at 1:53
  • @jon-b any feedback on this situation? Did things work out as you expected? I'm looking to do the same (outsource to a foreign company); and since it's been over a year since you posted maybe you have some first hand experience now :) – Lucas Nov 10 '15 at 16:13
  • @Lucas everything was accurate when we filed according to both our tax agent and the IRS. i'd still suggest you consult your own accountant so they may consider your specifics – Jon B Nov 10 '15 at 17:55
  • So, to avoid paying tax for contractors in the same country, I guess you can pay them via a 3rd party overseas? That's nice. – Sam Watkins Feb 15 '16 at 5:33
  • @SamWatkins If they're a US resident, paying through some 3rd party isn't going to achieve that really unless the 3rd party is paying that contractor under the table. But then that's between that person and the country of said 3rd party company. – Jacob Thomason Aug 31 '16 at 21:12
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If you're paying a foreign person directly - you submit form 1042 and you withhold the default (30%) amount unless the person gives you a W8 with a valid treaty claim and tax id. If so - you withhold based on the treaty rate.

From the IRS:

General Rule

In general, a person that makes a payment of U.S. source income to a foreign person must withhold the proper amount of tax, report the payment on Form 1042-S and file a Form 1042 by March 15 of the year following the payment(s).

I'd suggest to clarify this with a licensed tax adviser (EA/CPA licensed in your State) who's familiar with this kind of issues, and not rely on free advice on the Internet or DIY. Specific cases require specific advice and while the general rule above holds in most cases - in some there are exceptions.

  • This is actually untrue for foreign workers working outside of the US, but ty for the answer! – Jon B Jul 29 '14 at 23:33
  • the keyword here is "U.S Source of Income", which means that the foreign contractor is rendering the service while in the US. Which is not the case in the original question. – smertrios Sep 24 '15 at 0:41
  • @smertrios what makes you think so? – littleadv Sep 24 '15 at 2:05
  • @littleadv: the IRS page below defines which factors determines the "source" of income. In the case of a foreign contractor rendering some service (design, programming, etc...) remotely from their home country then it is considered a "non-US" Source of Income, which is not subject to US income tax: irs.gov/Individuals/International-Taxpayers/… – smertrios Sep 26 '15 at 19:22
  • @smertrios where in the question does it say the OP is foreign? – littleadv Sep 26 '15 at 19:47
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If a person is not a U.S. citizen and they live and work outside the U.S., then any income they make from a U.S. company or person for services provided does not qualify as "U.S. Source income" according to the IRS. Therefore you wouldn't need to worry about withholding or providing tax forms for them for U.S. taxes. See the IRS Publication 519 U.S. Tax Guide for Aliens.

protected by Chris W. Rea Oct 11 '16 at 18:58

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