We are going to start a VA business with family members in the Philippines. My accountant has advised me that unless they register as a separate business there, then we will be liable for payroll taxes. This doesn't sound right to me since our relatives are not US citizens and would be working in their own country. Even if they are a separate business, the IRS seems to require 30% withholding on payments to foreign contractors. However, I believe this doesn't apply if the country has a tax treaty with the US, as is the case with the Philippines. Does anyone know the answer, or can you point me in the right direction?

Thanks,
Michael

I don't know anything about foreign workers, but I found this on the IRS website:

"How do I treat foreign persons working as independent contractors?
A nonresident alien may be entitled to claim a tax treaty exemption from withholding on some or all compensation paid for personal services. In order to determine if the treaty exemption is applicable, refer to the section entitled “Pay for Personal Services Performed” in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Persons who wish to claim this exemption should provide you with Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual."

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Rebecka Melson ~ Virtual Business Services

This publication is referring to nonresident aliens which are non US citizens who are living/working in the US. So it wouldn't apply to someone living/working not in the US.

Originally Posted by Rebecka

A nonresident alien...

As far as I know, if the person is NOT a US citizen and is NOT living on US soil and is NOT working on US soil then you don't withhold US taxes. If they don't file US taxes (and don't have to) then you don't withhold US taxes.

I'd ask your accountant for the publication or IRS.gov notation that state you need to withhold the 30%, I've never heard of that before.

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Lanel Taylor, CVA ~ Virtual Bookkeeper
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My first VA job was with a company in the States and their lawyer told them since I am not a US citizen and I don't live in the States, then they weren't responsible for anything other than to pay my invoice to me. I'm Canadian and I live in Canada. I just happen to contract with companies in the US. I still pay my own taxes etc.

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Shari Sultana
Online Business Manager (marketing for retail ecommerce)

Originally Posted by lanelt

I'd ask your accountant for the publication or IRS.gov notation that state you need to withhold the 30%, I've never heard of that before.

My accountant didn't come up with the 30%, I read it IRS instructions for Form W-8BEN, which states the following:

Purpose of form. Foreign persons are subject to U.S. tax at a 30% rate on income they receive from U.S. sources that consists of:

• • Interest (including certain original issue discount(OID));
  • Rents;
  • Royalties;
  • Premiums;
  • Annuities;
  • Compensation for, or in expectation of, services performed;
  • Substitute payments in a securities lending transaction; or
  • Other fixed or determinable annual or periodical gains, profits, or income.

Here is the link:

http://www.irs.gov/pub/irs-pdf/iw8ben.pdf

From what I've read, I don't think the withholding is required if there is a tax treaty between the US and the other country, but I believe the foreign contractor has to claim this by filing Form W-8BEN. It seems pretty clearcut. Is there something I'm missing?

Thanks,
Mike

You have me stumped right now...I'm asking some of my tax expert/CPA colleagues because I've honestly never heard of this.

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Lanel Taylor, CVA ~ Virtual Bookkeeper
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Originally Posted by mpb722

Purpose of form.Foreign persons are subject to U.S. tax at a 30% rate on income they receive from U.S. sources that consists of: • Compensation for, or in expectation of, services performed;

OK, here's what I found:

http://www.irs.gov/businesses/intern...164600,00.html

Question 4: What is U.S. sourced income?
4- Personal Services – If the services are performed in the U.S., the payment for those services is generally U.S. sourced.

The way I read that is if the service is NOT performed in the U.S. it's not U.S. sourced thus not subject to U.S. tax. (That link actually explains a lot.)

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Lanel Taylor, CVA ~ Virtual Bookkeeper
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Originally Posted by lanelt

This publication is referring to nonresident aliens which are non US citizens who are living/working in the US. So it wouldn't apply to someone living/working not in the US. As far as I know, if the person is NOT a US citizen and is NOT living on US soil and is NOT working on US soil then you don't withhold US taxes. If they don't file US taxes (and don't have to) then you don't withhold US taxes. I'd ask your accountant for the publication or IRS.gov notation that state you need to withhold the 30%, I've never heard of that before.

My Bad... LOL It's been a busy day. I didn't read through the whole thing. I just saw the question and assume it was referring to the same thing. That's what I get for not paying attention.

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Rebecka Melson ~ Virtual Business Services

Originally Posted by lanelt

The way I read that is if the service is NOT performed in the U.S. it's not U.S. sourced thus not subject to U.S. tax. (That link actually explains a lot.)

Thanks, Lanel! I think that clears it up.

Mike

Originally Posted by Rebecka

My Bad... LOL It's been a busy day. I didn't read through the whole thing. I just saw the question and assume it was referring to the same thing. That's what I get for not paying attention.

Don't ask me though....I read something else somewhere today that seemed to say different than what I posted there.

You know...this question was a good one...I spent more time than I'd care to admit (and a little bit of that time arguing with the answer I received LOL) researching this.

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Lanel Taylor, CVA ~ Virtual Bookkeeper
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