by: AskPat 177 Episode Transcript
Pat Flynn: Hey, hey. What's up, everybody? Pat Flynn here, and welcome to Episode 177 of AskPat. Thank you so much for joining me today.
A lot of you know that I had, in the past, a couple of virtual assistants from the Philippines and they were great, they're amazing. Currently I have a team, but they're all US-based, but I have worked with overseas workers before, and one of the most common questions I get has to do with working with VA, so let's hear that question today from Pete.
Pete: Hey, Pat. This is Pete from ElfBoxes.com. I have a question about dealing with virtual assistants and people that you contract overseas to do stuff with your website or to handle your tasks. When you deal with someone like that, would you have to do a W-9 or something like that like you would for an American? And when you're filing out your taxes and keeping track of your expenses, when dealing with these virtual assistants and people overseas, is there anything that you need to keep in mind with that? Is it still fully deductible, stuff like that? Thanks for taking the time to answer these questions, Pat.
Pat Flynn: Pete, thank you so much for the question. You know, this is, like I said, a very common question, and I'm not a lawyer and I'm not a professional accountant or CPA, which is why I asked my accountant, Dave, over at ProfitwiseAccounting.com over here in San Diego. He's awesome, by the way. I asked him this question so we can get a true answer, and there's some more links if you go to the show notes at AskPat.com, again, for episode 177. You'll see a link to a post that talks in more detail about this, but I'm going to try and summarize and talk a little bit about this based on his answer.
So, I asked Dave, “Dave, I have a question for AskPat that I'd love your help on. The question is, when you contract someone overseas, do you have to issue them a W-9?” And he came back to me, and like I said, he's awesome, because he said he would love to comment on this. He says, “In an ideal situation, you would not have to issue them a 1099-MISC form.” Now, for those of you who are overseas right now, this might not matter to you. You might just listen to every AskPat episode, and that's awesome, but this is sort of specifically for those in the US hiring overseas. But it could still be interesting to you, so, sort of, I'm going to get back to our regularly scheduled program. But that's like what I said earlier: in an ideal situation, you don't have to issue anything and you don't have any tax reporting obligations.
But there are other considerations you need to look at first, and so there's a post on, actually, my lawyer's site that you can read, written by Dave, because my lawyer was getting a lot of these questions as well. If you go to AskPat.com/overseas, overseas, that will take you to this post where you can get more detailed information on this, but I'm going to sort of go over this page right now for you, just so you kind of understand what's going on.
So, on this page he says, “You're probably aware, if you hire an independent contractor in the US, you are generally required to report payments if over $600 annually on form 1099-MISC, which means you have to give them a W-9 to fill out, and then they … So on and so forth. Conversely, when you hire an overseas independent contractor, you typically will not have any tax withholding or reporting obligations. However, there are several conditions that must be met in order to be excluded from withholding and reporting obligations when hiring overseas.”
So, you have to answer these three questions. The first one is, does the worker meet the requirements of independent contractor status? So, this is like the most complex step, to make sure that this person can be considered an independent contractor; and actually, the IRS has a list of like 20 questions to consider whether or not that person that you're working with is an independent contractor. A key factor is the control you have over the work that they do. It's like if you have the right to control or direct only the result of the work, and not how the work will be done, then the person is generally considered an independent contractor; they're independent from the work that they do, but they're required to sort of fulfill the duties of what they are doing. You're not actually telling them how to do what they do, which, if you have an employee, for example, you have the ability to tell that person, for example, how to do certain things to get the job done. There's more stuff in this post here: again, that's AskPat.com/overseas. But that's a big requirement.
And sort of on a side note, there's a lot of countries now that are enacting laws to protect independent contractors, and if you're thinking of hiring overseas, especially if they're going to be providing substantial services for your business, you can avoid unpleasant surprises by carefully checking the in-country laws, because some countries, for example, like in Spain, an independent contractor who spends 75 percent or more of their full-time effort working for a single client, they might actually be classified as economically dependent autonomous workers who must be provided benefits such as paid time off and severance pay, so just be careful there.
Now, the next question you're going to have to ask yourself is, in what country does the worker maintain residence? So, it's important that you want to actually verify the workers' country of residence to make sure he or she is not a US resident, and the best way to obtain proof is to have the independent contractor complete and sign the W-8BEN form. The tax requirements are often tied to the resident status of you the payer versus that of the independent contractor, so in general, if you're not a resident of the country and have permanent establishment in the country in which the independent contractor is a resident, then there's not a requirement to withhold taxes on payment or file employment tax reports. So, for example, if you hire an independent contractor in India, and your business is solely located in the US, in most cases you will not be required to withhold any taxes or report payments made.
Now, finally, the last thing you need to consider is where the services are being performed. Most cases, the overseas independent contractor will be performing the work in the country of his or her residence, so compensation paid to a nonresident alien for services preformed outside of the US is not considered wages and is not subject to withholding. However, if the nonresident alien comes to the US to work for part of the time, the result can be different, and there's a lot more stuff going on there. So, again, just check out the post at AskPat.com/overseas, but in most cases, and again, I'm not a lawyer, I'm not a professional. Make sure you get the word from your CPA or professional accountant. In most cases, you won't need to report anything if you're working with somebody overseas.
So, that's that. That was probably one of the most technical questions we've gone over so far. So, anyway, Pete, I hope that answers your question—thank you so much—or at least gives you some direction or something to think about when you discuss this with you CPA. An AskPat t-shirt is going to be headed your way. Thank you so much. For those of you listening, if you have question you'd like potentially featured here on the show, just head on over to AskPat.com. Thanks so much. Thanks again to Dave from ProfitwiseAccounting.com. He's awesome.
Let's finish with a quote, and today's quote is from Jim Rome. And he says, “Formal education will make you living. Self-education will make you a fortune.” Cheers, thanks so much, and I'll see you on the next episode of AskPat.