Hiring foreign workers

[vonbrocklin]

We retain an accountant but he could not readily answer an important question today so I figured I would check here.

The Scenario:

- We are a small U.S. based company legally incorporated as an LLC

- We have hired a sub-contractor based in the Netherlands to render a one-time service

- The total fee for the project is $3,000, and we may hire him again for projects in the future

The Question:

How do we legally pay him and cover our butts for taxes?

My accountant's initial understanding is that we pay 33% of his fee to the U.S. government, and that he then files a 1040NR form to collect less U.S. income taxes. This does NOT sound right to me, especially if he then gets double taxed in his own country.

Any accounting geeks out there? Or non U.S. residents who have worked for companies in the U.S.?

You probably want someone who speaks legalese to have a look at IRS Publication 515. I'd be surprised if the US didn't have a tax treaty with the Netherlands so you can most likely get away with a lot.

No offense but, "The Answer" should be to hire an unemployed US worker.

[Garreg]

No offense but, "The Answer" should be to hire an unemployed US worker.

Understand your sentiments - but it's not always practicle and hardly promotes a 'global market'.

vonbrocklin: 33% Doesn't sound right to me. I'll do some digging around and see what I can come up with.

Originally Posted by Garreg

Understand your sentiments - but it's not always practicle and hardly promotes a 'global market'.

When you're unemployed, practicality and global marketing are not exactly at the top of your list.

[Garreg]

Quite right - but I think you missed my point Anyway don't want to hog this thread - we go run on with this subject for some time

[Brian]

Maybe things are different here in Canada, but what you have is not an "Employer - Employee" relationship.

Taxes paid by an employer (in Canada) as based on the salary paid to an Employee. The key word being "Employee".

In the case where you hire a contractor, this is considered a business expense. You do not have an "Employer-Employee" relationship. In these situations, the Employer does not have to pay taxes to the Government for the services rendered by the contractor. The Employer is given an invoice by the sub-contractor, which is used as a business expense tax credit.

The contractor on the other hand claims all monies earned as self employed income when it is tax time. In addition to income taxes, the subcontractor must also pay the Canada Pension Plan fees (this is like your 401 plan in the US). Depending on the gross annual income of the self employed individual, they may be required to make quarterly deposits to Revenue Canada.

As I said though, things may be different in the States.

[vonbrocklin]

Originally Posted by johnk

No offense but, "The Answer" should be to hire an unemployed US worker.

We had three finalists for this project, 2 from the U.S. and 1 from the Netherlands.

1. U.S. guy number one was an arrogant jerk, who did not respond to emails and refused to accept our documented specs as being the "right" way yet was unwilling to provide alternate specs. He also said our timeframe was impossible.

2. U.S. number guy two very clearly exaggerated his abilities, which became clear discussing the architecture for the project. Nice guy but way over his head.

3. Netherlands guy responded to every email promptly, clearly understood our specs, said the timelime was perfectly reasonable, and even made some great suggestions on how to improve our architecture.

Now as a business owner, who would you hire???

Originally Posted by vonbrocklin

Now as a business owner, who would you hire???

D) None of the above


I guess you have to be out of work for 12+ months, while witnessing the off-shoring, to develop a distaste for sending our jobs overseas.

[Vixen]

The company you are contracting in the Netherlands is not an employee, they are a business expense for Professional Development. Therefore, you would just make payment to them.

You don't take taxes out on anyone that is not an employee.

[DigitalSkyline]

Hopefully one of our reprsentatives in DC will one day Tariff the hell out of these types of transactions. Till then, deal.

[shadowfyre]

Originally Posted by johnk

No offense but, "The Answer" should be to hire an unemployed US worker.

I agree with you 100% John. Knock on wood I haven't been unemployed but my significant other has for 3 years since the telcom market bottomed out.

Unfortunately to hire US workers you have to pay a higher rate, provide benefits, etc., and yes US workers tend to be spoiled (meaning most won't work past an eight hour day without expecting overtime) It is so easy for companies to hire overseas due to costs etc. But the US citizens suffer - there was a 60 minute report on about hiring overseas for accounts and alot of tech support. Financial institutions are only hiring foreign workers for the phone support.

[pbradley503]

I work for a US-based Corporation and we have had to deal with the exact same situation. First thing - Did you hire the person (they are an employee?) Or did you sign a contract with them to do the work (so they are an Independent Contractor?) You really shouldn't have hired them (employee - employer relationship) but if you did, good luck. I'd suggest firing them and then setting them up as an IC instead. If they were setup as an IC then you shouldn't take out any taxes from their cheque, (since they're not an employee but rather simply a vendor you do business with), you don't send them a 1099 (like you would do with other ICs located in the US), and it is their responsibility entirely to pay whatever taxes they have to (if they decide to report the income.) The US government is not involved at all in the issue of paying ICs located outside of the US. They don't collect any tax from you, they don't collect any tax from the individual.

[vonbrocklin]

Thanks pbradley, that is what I want to hear. He is an inpendent contractor, not an employee. Now I just need to hear this from my accountant, who you would think could have told me this by now.

[nelsonke]

It does seem like tax laws and regs actually favor contracting over seas. Down side is lots of luck if a business dispute arises. I got stung by doing work for an Austrailian firm about 15 years ago. They paid $15K upfront, and passed an international D&B report. The upfront payment was the first and last $ I saw. Never paid the rest of the $60K I was owed. I got a U.S. judgement - not worth anything unless I could catch them in the U.S.