getting temp help from overseas on internet

[ketanco]

Hello,
My business is based on a few websites and I started getting occasional help from a couple website coders living outside the US. I am paying them with paypal from my business paypal account. I write a brief description of work they do on subject line in the paypal form whenever I send a payment. So that it serves as a record. They are individuals and not giving me any receipt etc... so all I have is what paypal automatically emails me whenever I send a payment.

My questions are:
1-Can I show the payment to them as expenses when doing my taxes?
2-During tax time or before, do I need to hold any taxes about this and if so how? Or, since they are outside the US, this is just an expense and no tax witholding etc... will be necessary?
3-Does the total amount of money I am paying them make difference in any way / is there a threshold?
4-Is there anything else I am missing based on what I described above?

[vangogh]

I'm not an accountant so please bear that in mind as you read my response. I have filled out tax forms though.

Yes this counts as an expense. I don't know what business entity you are. I'm a sole proprietor and fill out a Schedule C to report my income. I just looked at last years return and one of the lines is an expense for contract labor. There are several other lines on the same form dealing with labor costs for example one for legal and professional services. I'm guessing you enter the expense into the generic one, but it's a guess.

I don't think you have to withhold any taxes. These aren't employees. They're people running their own business. If they were in the U.S. you would send them a 1099 which would show how much you spent and you'd need some basic information from them to show they are a business. It's possible there's some kind of form you're supposed to fill out when outsourcing overseas, but I'm really not sure. You can probably find any relevant forms on the IRS.gov site.

I don't think how much money is being paid will make a difference. There are minimum thresholds for when you need to send out 1099s (I think if you spend less than $600 on one person/business you don't need to fill out the form) so maybe if there is an international version there's a similar threshold. I don't think there's anything that would say you can't claim the expense though.

Other than the possibility of their being extra forms I can't think of anything else. Someone with more experience with tax laws will know better and probably correct any and all errors I made.

[tmerrill]

Everything I know about taxes agrees with what vangogh said. I would also suggest having an accountant do your taxes, at least for one year to see how they do it and what info they ask you for. This should only cost around $100 for a very good CPA.

[Evan]

-Can I show the payment to them as expenses when doing my taxes?
2-During tax time or before, do I need to hold any taxes about this and if so how? Or, since they are outside the US, this is just an expense and no tax witholding etc... will be necessary?
3-Does the total amount of money I am paying them make difference in any way / is there a threshold?
4-Is there anything else I am missing based on what I described above?

1. Yes, these payments can be considered expenses. However, it is important to note that a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. The tax is generally withheld from the payment made to the foreign person. You are, therefore, a withholding agent and need to remit these taxes to the IRS, and are personally liable for the tax required to be withheld. This liability is independent of the tax liability of the foreign person to whom the payment is made. If you fail to withhold and the foreign payee fails to satisfy its U.S. tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties.

2. See above. These individuals will need to furnish you a U.S. tax identification number. I recommend reading IRS Publication 515 (Withholdings of Foreign Persons), Form and Instructions 1042, and Publication 901 (Tax Treaties)/

3. It depends on the country, though generally all payments would be subject to this threshold..

4. I wouldn't attempt to do this alone, I'd try to find a CPA who has experience in this arena.

[AccountantSalary]

Evan, would it be necessary for me to withhold tax if I'm hiring that person through a contracting company? Or does that apply there as well. Thanks.

[Evan]

Then that is the contracting company's responsibility. You need to get the W-9 from the contracting company, and should be paying the contracting company and not the individual.