I've got a question a lot of people might find useful. An American company employing freelancers from another country. When do you start withholding taxes on their income? Ever? Never? Can you just pay them a lump sum and forget about it? What are the rules for figuring out how to handle recurring freelance expenses. In our case, we're a travel magazine, employing freelance authors. Some authors are citizens of the U.S. living abroad, and others are non-citizens living in their own country or a third country.

Seconded. I'm in the opposite position, a UK freelancer taking payments and share options from the USA. Any advice or pointers to resources would be very welcome.

The American company is supposed to withhold the income tax on behalf of the contractor from the outset. There is no minimum payment. The moment you hire someone from international sources, you're required to withhold income tax on theie behalf. This is usually 35% of the amount paid. You effectively treating the contractor as a W2 because he's outside the united states.

The international contractor recieves a 1042-S and at the end of the year the US company would file the annual report 1042 to summarize all of the 1042-S they filed.

The american company would report of these payments under its quarter 941s and its annual 945 returns.

The foreign contractor gets a 1042S at the end of the year and would have to file a 1040NR to get a refund of their taxes withheld.

its an insane and complicated process but its all so that the IRS gets their fair shake. Most companies should be wary of hiring offshore because its actually a butt-ton of work but they never know these things until its too late.

The real horror story is that this is considered payroll tax and you're ALWAYS personally liable for these taxes. Thus, any company shareholder, director or executive is personally liable for these taxes. They can levy your bank accounts anytime for restitution.

Thanks for that Cam, it's not at all how I imagined! Just to be clear, this withholding applies even to money paid to non-US-citizens as long as the work is done for a US firm?

Does the non-US contractor have any US legal obligations if this tax isn't properly withheld? I'm quite certain I'm doing the right thing on my UK tax returns, but I'd hate to find I had trouble doing business in the US because of old unwithheld taxes...

I, and I'm sure many others, would like to know about share options for foreign nationals - again, I'm comfortable with the UK rules and regs, but is there also some US liability for foreigners taking share options?

Thanks again, your kindness is really heartening.

Yes, the withholding rules are much more strict for foreign contractors. Share options are very complicated because there's a variety of moving factors. I wouldn't be able to say very much unless I knew more.

Ugh, I was under the impression it was only applicable for people you paid more than $600 to. Well, that's a pain in the ass. How likely is it that the foreign contractor gets their taxes back? Is it possible to streamline it for them in any way? How come we don't hear much about enforcement in this area? Isn't every time you hire someone from O-desk or E-lance you have to do this? BTW, thanks for your time, its really awesome of you.

Yea, I'm not surprise that you'd logically figure the 600 dollar 1099 de minimis rule would roll over to the 1042S. But, it sucks lol.

Realistically, enforcement is questionable. I know that I've seen them but usually I dealt with large companies so I cant say how common it is for small businesses.

Odesk and elance definitely have this problem and they're required to file them but realistically I dont know how aware they are of these issues or how they're handling them. Can't say definitively =X. But, legally they should be doing all of this as well. =)

Thanks for taking the time to do this, its been a great resource.

From https://odesk.com/info/howitworks/client/:

oDesk handles all financial transactions, sending secure payments to contractors across the globe. Just use our Work Diary to review hours, and we’ll take care of the rest!

I think you pay oDesk, and they pay the freelancer, so you're just paying a vendor and don't have to deal with taxes.

Its true, if you're using oDesk you dont need to handle the taxes. Because its their responsibility.

I thought he was asking if oDesk properly handles taking care of the 1042s on their side.

Phil Hodgens made an important and valid point to me that, I should've explained that the withholding only applies to "Effectively Connected Income" or ECI. This is mean that services performed within the united states or earned in the united states.

Thus, if the services are performed outside the country, then they wouldnt be required to withhold taxes. But, you'd still have to file the 1042 informational returns.

Ok, now I'm unclear again. So if a British author living in England writes a story for us and we pay them $1000, we don't have to withhold anything? To use a better example for HN, if you hire a programmer from Europe to do some work and they permanently live in Europe and do the work in Europe, what are the rules for withholding?

Then you wouldn't be required to withhold income tax for them because it isn't done in the united states and isnt effectively connected with the united states.

The 1042 and 1042s are withholding forms, but you'd still be required to file them. For informational purposes.

You rock Cam! Thanks for taking the time to share your knowledge.

Thank you Cam. Awesome to see specialist in specific area offering to help the community of users.