As your small business grows, you may enter new markets, including expanding your company internationally. If you do expand into international markets, you may look to hire independent contractors in a foreign country. When hiring an independent contractor in another country, it is important to understand some of the key considerations before you move forward with the relationship. Today’s post highlights a few key considerations when hiring an independent contractor abroad.
Know the Rules
Before you enter into any new market, you should become familiar with the regulations that will impact your business. When it comes to hiring an independent contractor, you should become familiar with the various employment and tax regulations that will be triggered by your new hire. Different countries have different rules associated with independent contractors. Some countries require the company to have a physical presence in the particular country in order to hire independent contractors. Other countries require that independent contractors be registered as sole proprietors or some other separate entity in order to provide independent contractor services. Ultimately, it is best to seek out an attorney in the particular country to advise you on that country’s regulations and standards.
The tax treatment of independent contractors varies from country to country. In addition to different tax withholding rules, there are certain exemptions that may be available to you depending on the country. The IRS has special requirements when employing and paying contractors from another country. Depending on the circumstances, you may be required to withhold taxes from the contractors’ payments. Some countries have tax treaties with the U.S. that allow the contractor to claim an exemption from the withholding requirements. As long as the contractor does so, then you are generally not required to withhold taxes. There are also year-end reporting requirements that are specific to non-resident contractors—similar to the requirement that you file Form 1099s for U.S. contractors.
In order to ensure that you do not open up your company (or yourself) to unnecessary tax liability, including costly penalties, it is important to discuss the tax implications of your hiring with a CPA or accountant that is familiar with the foreign country’s tax treatment of independent contractors.
Independent Contractor or Employee?
Further, how employees and independent contractors are defined varies between countries. For example, in the U.S. the IRS employs a multi-factor test to determine whether a particular worker is an employee or independent contractor. You can find a discussion of the factors here. It is important to understand the foreign country’s definition of independent contractor to make sure your workers are not re-classified as employees and subject your company to additional tax liabilities.
Have it in Writing
It is important to put together a written independent contractor agreement that lays out the scope of the relationship between the contractor and your company, the services the contractor is providing, the compensation, and provisions that protect the company’s intellectual property.
It is important to note that just because you call the worker an independent contractor and you have a written independent contractor agreement does not mean that the foreign country (or the U.S.) will treat the worker as an independent contractor. It also does not mean that any intellectual property necessarily belongs to you. You should be diligent to protect your company’s rights and understand your responsibilities.
Enforceability of Contracts
While your independent contractor agreement may be enforceable in the U.S., it may not be enforceable in another country. This is where working with legal counsel in the foreign country becomes increasingly important. In addition to reviewing and updating your contracts to make sure they are enforceable, legal counsel from the foreign country can assist you with enforcing your contracts if a dispute arises. In some countries without the benefit of a robust legal system, you may be taking your chances with any contract. Make sure you understand the risks before you enter into agreements across borders.
Before embarking on hiring independent contractors in another country, it is important to do your due diligence and make sure you understand the local employment laws and how they will affect your business in the foreign country. It’s also generally best to engage local legal counsel to review your contract and advise you on legal and tax considerations, particularly if you have long term expansion plans for the country.
Check out our objectve discussion on the advantages and disadvantages of hiring an independent contractor.
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