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Employing 1099 Foreign Contractors

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Employing 1099 Foreign Contractors

When looking to grow your company internationally, one of the first things you’re likely to consider doing is hiring people who live in the countries where you’d like to grow your business. If your company doesn’t have a subsidiary in a particular country, working with independent contractors can seem like a simple solution.

You don’t hire professional international contractors, or 1099 workers, the same way you hire employees, and the process is often easier and less complicated than hiring employees. Although hiring international contractors might seem like an efficient work-around when you’re testing the waters in a new country, it’s important to know, understand, and follow the rules regarding contractors. This includes ensuring the people you work with can be legally classified as contractors and not employees.

What is a 1099 worker?

What is a 1099 worker?

In the U.S., contractors — people who perform work for a company but aren’t actually employees of that company — often receive Form 1099 at tax time and are, therefore, often referred to as 1099 workers.

For years, contractors who earned more than USD 600 from a company received Form 1099-MISC, which stated how much a particular company paid them over the year. For the 2020 tax year, the Internal Revenue Service (IRS) introduced Form 1099-NEC (nonemployee compensation). Contractors who get paid through third-party processors, such as PayPal, and who earn over a certain threshold receive Form 1099-K. Forms 1099 report income instead of Form W-2, which companies provide for workers classified as employees.

People who get Form 1099 from a company are considered self-employed. The IRS notes that people in professional organizations, such as lawyers and doctors, often fall into the self-employed category. They offer their services to the public, and those who pay for the contractors’ services have a say over the work results but not how the work itself is performed. In the U.S., there are three tests a contractor needs to pass to be considered self-employed rather than an employee:

  • Behavioral: 1099 workers control how they perform the work, including where and when they do the work.
  • Financial: 1099 workers typically pay for their own materials and supplies. They don’t get reimbursed for expenses by the company.
  • Relationship: Often, 1099 workers perform work for a company on a limited basis. They don’t have an ongoing relationship with a company the way an employee does. Contractors also don’t receive benefits, such as vacation time or insurance, from the company.

While companies need to pay half of employees’ Social Security and Medicare taxes in the U.S. and withhold the employees’ portion from their paychecks, 1099 workers are responsible for paying both the employee and employer portion of the tax and making estimated tax payments on their own.

How do 1099s work?

Companies that make payments to certain nonemployee contractors need to file Form 1099 and provide a copy of the form to the contractor. As of the tax year 2020, companies should use Form 1099-NEC, not Form 1099-MISC, to report these payments. The form is required if the following circumstances apply:

  • The company paid the contractor at least USD 600 over the year.
  • The company paid someone who wasn’t an employee.
  • The company made a payment for services over the course of its business or trade.
  • The company paid an estate, individual, partnership, or corporation.

If your company pays contractors using a credit card or other payment processor to pay contractors, you shouldn’t file Form 1099-NEC. The processing company instead reports the payments you made on Form 1099-K.

The deadline for filing Form 1099-NEC is Jan. 31 of the year after the payments were made. For example, for payments you made in 2020, you had until Feb. 1, 2021, to file the forms because Jan. 31 fell on a Sunday. When you submit the forms, you send one copy to the contractor, one to the IRS, and one to your state’s revenue department. You should also keep a copy for your own records.

What are the criteria for issuing Form 1099?

What are the criteria for issuing Form 1099?

Your company needs to issue a 1099 to a contractor if certain criteria are met. Whether you need to issue a 1099-NEC or a 1099-MISC depends on the nature of the relationship and the reason for the payment. From the tax year 2020 onward, you should issue Form 1099-NEC to people you paid at least USD 600 to for any of the following:

  • Services performed by a nonemployee
  • Attorney or legal services
  • Fish or other aquatic life purchased from a person in the fish-catching industry who you paid in cash

From 2020 on, you should issue Form 1099-MISC to people for the following types of payments:

  • Royalties
  • Rent
  • Other income, such as awards and prizes
  • Medical services
  • Crop insurance proceeds
  • Fish purchased for resale
  • Proceeds paid to an attorney for settlement agreements or similar
  • Nonqualified deferred compensation

While you would have new employees fill out Form W-4 when you hire them, when you onboard contractors, you have them fill out Form W-9.

How to fill out a 1099 for a contractor

When filing Form 1099 for contractors, it’s important that you put the information in the correct boxes. On Form 1099-NEC, the amount you paid a contractor goes in Box 1. On Form 1099-MISC, different boxes correspond to the type of payment. For example, rent payments go in Box 1. You’ll also need to fill in information about the person you paid, such as the individual’s name, address, and Social Security or Employer Identification Number

Form 1099 penalties and fines for missed deadlines

The IRS expects companies to issue all required Form 1099s by the deadline. Submitting your forms by the due date helps the IRS detect fraud, as it provides the IRS with accurate information about an individual’s income. The IRS can compare the 1099s received for a taxpayer to the amount of income the taxpayer reported on a tax return to determine if anything suspicious is taking place.

To encourage companies to submit their forms on time, the IRS issues penalties for late filing. The amount of the penalty varies based on when the form gets filed. If your company files no more than 30 days after the deadline, the penalty is USD 50 per form, up to USD 556,500. If you file between 31 days late and Aug. 1 of the same year, the fee jumps to USD 110 per form, up to USD 1,669,500. If you file after Aug. 1 or don’t file at all, the fee is USD 270 per form, up to USD 3,339,000.

There’s also a USD 550 per form penalty for companies that intentionally ignore the deadline. Unlike other penalties, there’s no maximum amount if your company willingly avoids filing.

How to issue a 1099 to a U.S. citizen living abroad

If your company works with contractors who live abroad, you must issue Form 1099 to these contractors in certain circumstances. The following contractors should receive Form 1099 from your company:

  • U.S. citizens who are living and working abroad
  • U.S. citizens who live abroad but still work in the U.S. occasionally

If you use the services of contractors who are citizens of another country, you don’t issue them a Form 1099, as they don’t pay taxes to the U.S. Instead, any international contractors you work with will need to complete Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting. The contractor gives Form W-8 to you, not to the IRS. It’s used as proof of the contractor’s non-citizenship status and certifies that they aren’t obligated to pay taxes to the U.S.

The IRS would only see copies of Form W-8 BEN if it selects your company for an audit. In that instance, you’d need to have the form to justify your reasons — and the contractor’s reasons — for not paying taxes.

Otherwise, if the contractors you’re working with are U.S. taxpayers living abroad, you would follow the same process of issuing Form 1099 to them as you would to a U.S. taxpayer who lives in the U.S.

Work with Globalization Partners

Work with Globalization Partners

If your company is ready to go global, Globalization Partners is here to help you build your international team. With our Global Growth Platform™, you can quickly and easily hire and pay contractors and employees in 187 countries. To get started, contact us for a proposal.

 

THIS INFORMATION IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. You should always consult with and rely on your own legal and/or tax advisor(s). Globalization Partners does not provide legal or tax advice and the information is not tailored to the specific situations of your company or your workforce. Globalization Partners makes no representations or warranties concerning the accuracy, completeness or timeliness of this information. Globalization Partners shall have no liability arising out of, or in connection with, the information, including any loss caused by use of, or reliance on, the information.

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