Please Help:Tax Question About Hiring Freelancer From India.

State of New York

I am officially confused.

This is my situation: I'm a independent contractor for an online company. I am planning on hiring a freelancer from India to assist me with some of the work.The freelancer from India is being hired as an independent contarctor. He is using his own equipment, working on his own time and etc. He has never been to the United States. He is basically working from his computer.

I called the IRS office and asked them about the situation. below are the questions I asked:

1.) Is the freelancer required to fill out a W8 form and if so, which one is he supposed to fill out?

                   Her Answer: He would fill out the W8BEN form.

2.)Is there any other form is that required to be filled?

                   Her Answer: No

3.)The money spent to pay the freelancer in India for his work, can that be claimed as a business expense?

                    Her Answer: Yes

4.)Am I required to withhold a certain amount of payment from the freelancer?

                    Her Answer: Yes, you are required to withhold 30%.

I decided to double check and went to one of the offices locates nearby.

The lady at the office (face to face) said:

I wouldn't have the freelancer in India fill out a W8 form but I would have them fill out a W9 form. She also stated that I am not required to withhold any payment from them since they are independent contractors and not an employee. I made sure to ask her again and also told her that this person isn't from the US and lives and work fron India. She said yes, you would have them fill out a W9 form.

I am completely confused. I am asking the IRS the same questions and getting different answers. The people at the office who WORK for the IRS can't even get it right. This is to show that the tax law is just too confusing.

Can someone please help me? I am on hold trying to get the tax thing in order. I don't want any problems with the IRS but they're not helping much either.

I'm not so sure--if you hire an independent in India --so be it. He's a contractor.

If you create an employee in India--now you have issues.

Thank you Drew for your quick response.

I don't quite understand. You stated "if you create an employee in India--now I have issues". The lady said that he would be considered an employee if I am supplying the equipment, if I tell them when to do the work, time he is suppose to do the work.

Would it be possible to hire an independent contractor (freelancer) from India?

Sorry for all the questions, this is my first time and even the IRS is giving me mixed information.

Subject to verification by our tax expert, if he is in business for himself performing services for you (you're the client) and he bills you by invoice, you shouldn't have any IRS issues and you use the invoices to support your expense deduction.

I wouldn't call him an independent contractor any more than I would call a lawyer, CPA, the pool boy, or the cleaning lady an independent contractor. They are all in businee for themselves performing services on a fee basis.

That's how you avoid the independent contractor dilemma.

Please refer to IRS Publication 515 - Withholding of Tax on Payments to Nonresident aliens and Foreign Entitites.  A link to the pub is below.  There do exist times when you would b e subject to withhold tax on payment to foreign entities.  This publication is pretty thorough and also has tax treaty tables for 1) payments for things other than personal services and 2) payments for personal services.

http://www.irs.gov/pub/irs-pdf/p515.pdf

There was a study a few years ago that indicated the answers given by IRS employees are often wrong; if Taxagent doesn't respond, I'd make an appt with an attorney to be sure you get it right.

Thank you everyone for the great advice. I am going to speak with an attorney about this situation. Thank you once again everyone. I really appreciate the time everyone took to answer my concerns.

JonB11:

I am going to speak with an attorney about this situation

CPA might be more appropriate for the tax issues.

adjuster jack:

CPA might be more appropriate for the tax issues.

I disagree. Either an attorney or CPA might be able to address the question, but the key in selecting either one is to make sure that he or she is familiar with the Internal Revenue Code provisions relating to foreign persons who have U.S. source income, including particuarly IRC §§ 1441-1146, which are the primary sections that require withholding on payments to certain persons.

adjuster jack:

I wouldn't call him an independent contractor any more than I would call a lawyer, CPA, the pool boy, or the cleaning lady an independent contractor. They are all in businee for themselves performing services on a fee basis.

Jack, an independent contractor is a self-employed person in business for himself. The lawyer, CPA, pool guy, etc, are all independent contractors if they are sole proprietors. And a person in business making payments to such a person in the U.S. exceeding $600 in a year must provide that person with a Form 1099-MISC.

JonB11:

This is my situation: I'm a independent contractor for an online company. I am planning on hiring a freelancer from India to assist me with some of the work.The freelancer from India is being hired as an independent contarctor. He is using his own equipment, working on his own time and etc. He has never been to the United States. He is basically working from his computer.

O.k., let's start with the basic rules for Internal Revenue Code § 1441 (which I've simplified quite a bit given the facts you posted). You must withhold on payments you make to foreign persons if you pay them fixed or determinable annual or periodical (FDAP) income (or certain other payments not relevant here) and those payments are U.S. source income. Compensation for personal services performed is a type of FDAP income. However, for personal services, the source of the income is determined by where the services are performed. Thus, if the services are performed in the U.S., the compensation for that is U.S. source income. If the services are provided outside the U.S., it is foreign source income.

The exact details matter, and I don't have them. But taking just what you said above and assuming that the guy in India is working for himself (i.e. is a sole proprietor) and that he meets the requirements of being an indepenent contractor, and that all work will be performed outside the U.S., here's how that should play out. The payments involved here would be foreign source FDAP income, and as a result, those payments are not subject to withholding under IRC § 1441. You'd get him to provide a Form W-8BEN. If you read IRS publication 515, you'll see that's the bottom line, though the publication goes into greater depth. Thus, both persons to whom you talked at the IRS got it wrong, unfortunately. These rules are complex and most IRS customer service folks don't deal with them all that often.

You may wish to confirm that with a tax professional (enrolled agent, CPA, or tax attorney) who is familiar with the rules for withholding under IRC § 1441, since you don't want to rely on anonymous persons on the internet for this. If you get it wrong and were required to withhold, the tax law makes you personally liable for paying the tax that should have been withheld, plus penalties. Furthermore, that liability is not dischargeable in bankruptcy.

Taxagent:

Either an attorney or CPA might be able to address the question, but the key in selecting either one is to make sure that he or she is familiar with the Internal Revenue Code provisions relating to foreign persons who have U.S. source income, including particuarly IRC §§ 1441-1146

Thank you!  (I'm sure Section 1146 is just a typo, instead of 1446).

OP can seek out a tax attorney or CPA to advise on this situation; but it is truly best to find one with specific expertise on this topic.

I do recommend OP read at least IRS Publication 515 to get a general understanding; it will help him in formulating questions and also preparing information on his proposed arrangement for review by a professional with the needed expertise.  (to hopefully save some fees)

cross posting at the same time (sorry)

JonB11:

3.)The money spent to pay the freelancer in India for his work, can that be claimed as a business expense?

I forgot to address this one in my previous response. The payments you make for him would indeed be a deductible business expense. See IRS publication 535 on business expenses for more information. It doesn't matter whether the independent contractor is in the U.S. or some other country when determining if the payment is deductible.

LG81:

(I'm sure Section 1146 is just a typo, instead of 1446).

It was a typo, section 1446 is indeed what I intended.