Form W8Wade Wilson, CPA

A colleague recently posed the following situation: a client in the United States was hiring foreign contractors to perform services for the company from their home countries. He was paying them in U.S. dollars but sending the payments to the contractors in the foreign country. He was wondering what the tax reporting implications of such a transaction would be.

Foreign workers performing services outside the U.S.

This is an easy one. There is no withholding requirement for foreign individuals who are performing services outside of the United States. However, there are some documentation requirements the employer should follow in order to satisfy the Internal Revenue Service. That documentation is principally having each foreign contractor complete a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding in order to establish that they are not a U.S. citizen, and to claim they are the beneficial owner of the income for which the form is being provided.

Foreign workers performing services in the U.S.

Often times though, a U.S. company will contract with a foreign individual outside of the United States and then want to bring the contractor to the U.S. to work temporarily. The length of time the contractor is in the U.S., and the country where he is a resident, will impact the tax consequences. Generally, companies are required to withhold thirty percent of compensation paid to a nonresident alien. Therefore, a review of any applicable tax treaties is important. The best thing is to address these requirements before the worker enters the United States.

For example, in addition to Form W-8BEN, there will be potential withholding and reporting requirements. This may include completion of Form W-7, Application for IRS Individual Taxpayer Identification Number, or, perhaps, completion of Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.

For independent contractors, the company will generally be providing the contractor a Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. Additionally, the company, in a timely manner, must deposit any withholding using the Electronic Federal Tax Payment System (EFTPS). Timely deposits are essential because penalties for late payment can be severe.

Please call 404.841.6250 to discuss additional information or to discuss your specific situation.