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  1. #1
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    taxes for outsourcing work?

    Hi,

    I have two coders that I outsource my work to who live in Russia? How should I handle the taxes for the payments I have sent to them? Will it be deductible or will it not since they are based in Russia and the US cant tax them?

  2. #2
    SitePoint Guru El Camino's Avatar
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    Don't deduct taxes. Be like Google. When they pay a US Adsense publisher they deduct income tax. When they pay a Canadian based Adsense publisher they don't.

  3. #3
    In memoriam gold trophysilver trophybronze trophy Dan Schulz's Avatar
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    Freelancers are not employees. As a freelancer, a person is an independant contractor, and is thus responsible for filing their own taxes. If you paid them at least $600 USD in the given calendar year, you do have to declare it with the Internal Revenue Service (IRS) via Form 1099 (you also have to send a copy of the form to the contractor - since the contractors live in Russia, check with the Russian government to determine what forms you have to send them as well).

    I hate to sound discriminatory, but this is exactly why I don't do business outside of the United States. The paperwork for American taxes alone is enough to kill me.

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    Im only 21 so I dont know anything about taxes.

    The work for the coders is over $600 and I haven't discussed with them about sending them a 1099. What happens if I dont send a 1099 with to the IRS? What exactly does a 1099 do?

    Deductible means that I the government wont tax me for the money I earned which I spent on my occupation correct? Is paying employees deductible since its going towards my business?

    Since they are in another country whats it going to do for me if I send it the Russian government? The russian government isn't going to come after me right?

    Whats the IRS going to do with a 1099 for a Russian employee? They cant tax people from Russia correct?

    Basically what do I have to do to not get in trouble and save the most money?

    Im sure a lot of these questions sound stupid to you elders but please enlighten me with your wisdom and I would greatly appreciate it.

    Thanks

  5. #5
    SitePoint Wizard Lil_Red's Avatar
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    It really sounds like you need to go make an appointment with a tax accountant ASAP before you do get in trouble with the IRS.

  6. #6
    In memoriam gold trophysilver trophybronze trophy Dan Schulz's Avatar
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    Quote Originally Posted by Tbonec3
    Im only 21 so I dont know anything about taxes.
    I'm no expert on tax law, but I'll share what I do know and (think) I understand. As with all legal matters, talk to a professional before doing anything.
    Quote Originally Posted by Tbonec3
    The work for the coders is over $600 and I haven't discussed with them about sending them a 1099. What happens if I dont send a 1099 with to the IRS? What exactly does a 1099 do?
    Form 1099 is simply a declaration to the IRS that a person has been paid more than $600 in a given calendar year. It essentially tells the IRS that non-traditional wage income has transferred hands between two parties. Think of it as giving the IRS a "heads up" so to speak.
    Quote Originally Posted by Tbonec3
    Deductible means that I the government wont tax me for the money I earned which I spent on my occupation correct? Is paying employees deductible since its going towards my business?
    If you have actual employees, you are responsible for deducting (read: paying) their FICA, income, Medicare and Social Security taxes every time they get paid. Remember, the money that goes to pay their taxes comes out of their check, before they even get it. You're just taking it out for them. They still have to declare it when they file their taxes or else they'll be spending some hard time in the federal slammer. As an employer, you are also responsible for matching their FICA, Medicare and SS taxes as well. The current rate for these three taxes for employees is 7.6% - which means the employee pays 7.6% and you pay another 7.6% out of the company's pocket.

    Independant contractors (including freelancers) are NOT employees, and as such are responsible for paying ALL of their own taxes. Income, FICA, Medicare and Social Security. What makes things really interesting is that ICs have to pay what their employer would have on these taxes as well. So instead of a nice cushy 7.6% on these "contributions" they have to pay 15.3% to the IRS instead.

    And don't think the IRS will let you get away with non-payment for long, because they won't, and the penalties will be severe to catastrophic.
    Quote Originally Posted by Tbonec3
    Since they are in another country whats it going to do for me if I send it the Russian government? The russian government isn't going to come after me right?
    I know NOTHING about Russian law. However, my guess is that they would go after the contractors for not paying their taxes. It's still a good idea to let the Russian authorities know that you are conducting business with people in their country though. A simple "heads up" can't hurt. A tax professional will be able to tell you more about this though.
    Quote Originally Posted by Tbonec3
    Whats the IRS going to do with a 1099 for a Russian employee? They cant tax people from Russia correct?
    If a person is in Russia doing business with an American, and they get paid by an American, I think that the Russian would have to pay American income taxes since the Russian guy is "doing business" inside the United States.
    Quote Originally Posted by Tbonec3
    Basically what do I have to do to not get in trouble and save the most money?
    Stop calling them employees for one. The next thing to do is to make sure your contracts with these guys states that they are independant contractors, not employees. It sounds to me like you haven't put a lot of thought into this, which will really come to bite you in the posterior should the IRS choose to audit you (and from what I have read, I'd do it in a heartbeat if I was them). Employers are responsible for their employees' taxes. Clients are not responsible for their contractors' taxes. The contractors are.
    Quote Originally Posted by Tbonec3
    Im sure a lot of these questions sound stupid to you elders but please enlighten me with your wisdom and I would greatly appreciate it.

    Thanks
    Elder? I'm only 27, and this is my first year freelancing. I still have a lot to learn.

    In the meantime, try reading up on some of the books published by Sphinx Publishing and Nolo. Especially Nolo.

  7. #7
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
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    Working with offshore vendors is about as easy as it gets. You can treat them as non-US entities and you don't have to withhold, or even 1099 them in most cases. If you don't have a good CPA to advise you, you should get one immediately.

    Most of my vendors are paid via wire transfer and I take a 100% deduction on them with literally no tax reporting or withholding requirements.
    The fewer our wants, the nearer we resemble the gods. Socrates

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    SitePoint Guru El Camino's Avatar
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    Quote Originally Posted by Dan Schulz
    It's still a good idea to let the Russian authorities know that you are conducting business with people in their country though. A simple "heads up" can't hurt. A tax professional will be able to tell you more about this though.
    You do not need to contact the foreign government. It's up to the foreigner to declare his own taxes. Google Adsense does not contact the Canadian government. It up to Canadian Adsense publishers to declare their own income to the Canadian gov't.

    Quote Originally Posted by Dan Schulz
    If a person is in Russia doing business with an American, and they get paid by an American, I think that the Russian would have to pay American income taxes since the Russian guy is "doing business" inside the United States.
    The foreigner would pay taxes to his foreign government. He does not pay US taxes. You may want to get the foreigner to fill out a 1099 or give you the info to fill out a 1099 fro him. You then submit the 1099 with your tax return. This ensures, among other things, that you have evidence of the payments as a business expense. The 1099 does not get submitted to the foreign government

    Just pay your foreign programmers without any deductions and get info from them to fill out a 1099 for each at the end of the year that you will then include with your return.

  9. #9
    In memoriam gold trophysilver trophybronze trophy Dan Schulz's Avatar
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    Like I said, it's my first year doing this. Learning as one goes, and all.

    I still won't do business outside the US though.

  10. #10
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
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    Quote Originally Posted by El Camino
    You do not need to contact the foreign government. It's up to the foreigner to declare his own taxes. Google Adsense does not contact the Canadian government. It up to Canadian Adsense publishers to declare their own income to the Canadian gov't.


    The foreigner would pay taxes to his foreign government. He does not pay US taxes. You may want to get the foreigner to fill out a 1099 or give you the info to fill out a 1099 fro him. You then submit the 1099 with your tax return. This ensures, among other things, that you have evidence of the payments as a business expense. The 1099 does not get submitted to the foreign government

    Just pay your foreign programmers without any deductions and get info from them to fill out a 1099 for each at the end of the year that you will then include with your return.
    With all due respect, your advice isn't 100% accurate. First, you dont' submit 1099's with a tax return. They go to the payee and there's a different form that goes to the IRS. Third, it's not always necessary to 1099 contractors, and many offshore developers won't require a 1099 at all. Submitting forms to the IRS that aren't required isn't always a good idea because it can lead to audits or other problems. A contractor doesn't fill out a 1099 - they usually submit a W9, if anything. Finally, it's not required to contact the Canadian government but there are some situations where you DO have to contact the foriegn gov. For instance, transactions above a certain value need to be reported in India & Malaysia, and Thailand has special reporting requirements for corporations receiving over a certain amount from a single offshore client.

    The tax reporting rules are complex, and vary widely. The best advise is to see a CPA or qualified person who can provide solid advice that fits your situation exactly.
    The fewer our wants, the nearer we resemble the gods. Socrates

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    SitePoint Guru El Camino's Avatar
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    You are right. I was thinking of a W9. When I worked in Canada - US clients would send me a W9. Most US clients didn't know how to handle me so I would get a number of different forms that they thought I needed or should fill out - including a 1099.

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    Hi,

    I learned some usefull things here but I have a question.

    Looking from the other side (a contractor who works for US-based company)..
    Does he need to pay US taxes ? Declaring his income (and paying taxes out of that) in his country's tax office is something he should do but what about US taxes ?

    thanks for your help

  13. #13
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
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    A contractor outside of the US shouldn't have to pay US taxes unless they are a US citizen/taxpayer or there is some special circumstance. There are exceptions to this, but not many.
    The fewer our wants, the nearer we resemble the gods. Socrates

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  14. #14
    Serial Publisher silver trophy aspen's Avatar
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    Since when do you ask foreign people to fill out w9's (so you can send them a 1099) or worry about reporting to their government?

    You don't need to send someone a 1099 to write off what you pay them.

    If you don't believe me, believe every single US based ad network and affiliate program that only collects tax ID information from US citizens.
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