1099 for international contractors? Requirements for hiring and paying foreign workers

August 25, 2020

1099 for international contractors

U.S. companies continue to look overseas for talent, with worldwide employment of foreign workers standing at over 42.5 million workers, according to the U.S. Bureau of Economic Analysis.

Although hiring globally can help fill employment needs, it can also expose organizations to risk when dealing with a key foreign worker demographic: international independent contractors. Lax oversight of local employment regulations and compliance could lead to severe regulatory fines and penalties.

1099 and international contractors

To be clear, international independent contractors aren’t 1099 workers. But because “1099” is the IRS code for U.S.-based contract workers, U.S. companies may associate “1099” with all contractors, regardless of where the contractors are based.

However, the IRS doesn’t require a company to withhold taxes or report any income from an international contractor if the contractor is not a U.S. citizen and the services provided are outside the U.S. Filing a 1099 is required if:

  • The contractor is located internationally but is a U.S. citizen
  • The contractor is a U.S. citizen living abroad but still performed some work in the U.S.

1099 for international contractors: Upsides and downsides

Regardless of the terminology, international independent contractors offer ample upsides for U.S companies:

  • International contractors can bring talent and value into countries where a company has no foreign subsidiary or entity
  • Organizations can often obtain talent at a lower cost relative to full-time salaried workers because they aren’t required to provide foreign contractors with employee benefits like healthcare, retirement plans and paid time off
  • Companies can leverage contractors to work on country-specific projects in a locale where the firm may have no “insider” project expertise (for example, a Parisian systems programmer working on a big government technology contract between a U.S. multinational and the French government)
  • Handled correctly, a company can be free of the responsibility for withholding income and taxes for international contractors

Along with the benefits of international contractors come risks in bringing them into the fold.

First among the downsides are the uncertainties surrounding hiring a contractor in a country that may be unfamiliar to company managers. Then, and perhaps more importantly, is the risk of running afoul of in-country employment, tax and benefits laws. Misclassifying an independent contractor could lead to hefty compliance fines, penalties and additional payments to contractors.

To mitigate the risks associated with hiring international contractors, it helps to have access to good local knowledge, which could mean contracting with an outside specialist who is well-versed in foreign employment laws and mandates.

Protecting your company from liability

An international contractor is an independent foreign worker who offers professional services to a company. The key term is “independent.”

The IRS, for instance, defines an independent contractor as follows: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

Other countries have their own rules and mandates on what constitutes a full-time employee and what constitutes an independent contractor, but “independent” is often a central component. Organizations working with international contractors may run into compliance barriers on several major fronts:

They directly manage the contractor’s work. If the hiring company—not the independent contractor—dictates the timeline, structure, style and other parameters of a project or workload, then that contractor may lose his or her independent status, and be deemed by the local government as a full-time employee.

They treat the contractor like an employee. Any company movement to reimburse expenses; offer computers, phones or other workplace tools to the contractor; pay or provide professional training; or pay for time off and offer employee benefits, may also lead to an “employee” classification by a foreign government.

Companies engaging contractors in foreign countries should focus on the specific criteria that may flip an independent contractor into the full-fledged employee status by a local government:

  • Contractor is paid for time worked rather than per project
  • Company tools or resources are used to complete a job
  • Contractor only provides services to one company and does so for an extended period
  • Company manages the day-to-day work of contractor

Making the right call on international contractors is imperative to U.S. organizations that want to be fully compliant with tax, employment and withholding laws in a foreign country.

If an overseas government deems an independent contractor as a full-time employee, the hiring company may not only have to shift its payroll and tax structure for its workers, it may also be liable for fees and penalties for misclassifying the worker’s employment status in the first place.

A “to do” list when considering international contractors

To stay in compliance on the international contractor front and avoid regulatory errors, companies should take these steps:

Ensure the contract is clear. The contractor must report all income and handle their own taxes—as the hiring company, you have no legal obligation to handle those issues for contractors.

That said, it’s always a good idea to stipulate income and tax obligations clearly in the contract between the hiring organization and the international contractor. In general, using a U.S.-based contract is fine in this instance, but it’s important that specific local employment rules and laws are included, where necessary, in the contract.

Additionally, it’s important to include language in a contract that protects your company’s intellectual property. Depending on the local laws, if not specifically stipulated in a contract, contractors may be able to claim rights to intellectual property for work they created. The best way to protect your organization is to clearly declare in a contract that you retain ownership of intellectual property for any work a contractor performs for your company.

Make payments and assign reporting responsibilities. Once you’ve hired and accurately classified a worker as an international contractor, you’ll need to set up payments to the contractor.

That payment process is usually done through accounts payable, with the international contractor submitting a timely invoice for work completed. As noted, an independent contractor is responsible for filing his or her own tax and withholding documents.

Know the tax rules. By and large, there is no requirement for the hiring company to issue an IRS Form 1099 to an international contractor, which would be the case if the contractor were based in the U.S.

However, a U.S. company engaging an international contractor should provide an IRS Form W-8BEN to the foreign contractor, and ensure it is prepared fully and accurately and is signed and dated by the contractor. The W8BEN is not submitted to the IRS, but it should be kept by the hiring company to certify the contractor’s foreign status in the event the IRS questions why taxes were not withheld.

Know the potential penalties in misclassifying overseas workers. Employee misclassification can result in fines, potential of back payments of taxes, insurance, pension or retirement plan contributions, or even jail time. For example:

  • In France, a manager has been sentenced to three years in prison for misclassifying independent contractors
  • A U.K. court granted a salesman 13 years of back pay after being misclassified as an independent contractor

An alternative to 1099 for international contractors

Another option for hiring talent in countries where you don’t already have a legal entity is a global employer of record, sometimes referred to as the international PEO or global PEO model.

This option is less risky than 1099 for international contractors because responsibility for complying with all the payroll and employment laws in the country shifts to the employer of record. As an employer of record client, you can benefit from the talent of international workers and manage their day-to-day contributions, but the employer of record handles the HR, payroll and compliance requirements of the global employment.

The employer of record model is also less costly—in both money and time—than establishing an entity in a country. The only monetary cost to the company is the fee associated with the employer of record service, a fraction of the expense required for setting up a legal entity in a country. Additionally, the time cost is cut extensively because, depending on the country, an employer or record can onboard employees in a matter of weeks.

Learn more about our first-to-market employer of record solution, Global Employment Outsourcing (GEO), and how it can help ensure global worker compliance without taking on the risks associated with international contractors. Contact us today to speak with one of our global solutions advisors.

 
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