Tuesday, February 6, 2007

When your subcontractors are in India


This is Dan again, from Quicken or Quickbooks .

Now for a different question: I mentioned that I am working with overseas developers in India. Taxwise, how do I handle this? Is there something that I am supposed to file? These developers are in no way my employees. They work under their own companies and I am contracting a certain amount of work to them.

Thank you very much for answering my questions.

Dan, you must withhold 30% federal tax on the income of the people who live and work for you in India. Each of them should complete a W-8BEN: Certificate of Foreign Status .... etc. You will need to file a Form 1042 [they each get a 1042-S at year-end] . You can get more information on this from the IRS at 866.455-7438 and you can get info on filling out Form 1042 also from the IRS at 215.516-2000.

Not all foreign workers have to be withheld at 30%. With some countries the US has reciprocal tax agreements and so that changes the mandatory 30%. At my latest understanding, we did not have such as agreement with India. But, check it out. Things are happening at web-speed.


Dan said...

The last IRS number for filling out form 1042 didn't quite come through...would you reply with the corrected number?

Thank you so much for these responses. I would be lost without you and your book :-)

June Walker said...

Whoops! # has been fixed.

And, you are very welcome.
-- June

dan said...

Just a quick update on this. I did some research along with a CPA friend. In reading the instructions for W-8 BEN we found reference to the document that details US Tax Treaties (Publication 901)http://www.irs.gov/pub/irs-pdf/p901.pdf

It states,"Income that residents of India receive for per­forming personal services in the United States during the tax year as independent contractors or self-employed individuals (independent per­sonal services) is exempt from U.S. income tax if the residents:

Are present in the United States for no more than 89 days during the tax year, and

Do not have a fixed base regularly avail­able to them in the United States for per­forming the services."

In my case, the contractors I am working with have not been in the US at all AND they have no US based operations.

I any one else is working with people outside the US I would recommend looking at publication 901

June Walker said...

Thank you, Dan. Changes are happening at web speed!
-- June

June Walker said...

Also, Dan, the 30% tax you withhold is not self-employment tax but income tax.
-- June

Revka Stearns said...

Alright, June, now I'm really confused.

Charles does not have to withhold taxes on the entertainers he hires (or at least that is not stated in the post). He doesn't collect W-8s, nor does he file form 1042.

What is the difference between these two situations?

I'm asking because I, too, am a self-employed web designer. I outsource a lot of my projects to a Swedish citizen who lives in Brazil. She sets her own hours, can work for/with whomever she chooses, uses her own equipment to perform all work, and works solely in Brazil. In addition, she only gets paid by me on a project basis - if she doesn't get any projects from me, she doesn't get any pay from me.

What are my tax responsibilities? Do I need a W8 from her; do I need to file a 1042? Or do I just keep track of the payments I make to her and classify them as business expenses?

I'm trying to figure this out to make sure I file everything correctly on this tax return.

Thanks so much for your help. Your blog is a great resource.