Taxes and outsourced foreign employees / contract workers

question for United States residents

[DXL]

For those of you who outsource projects to people outside of the United States, how do you handle the tax paperwork for that?

If $300 of a $1000 project is going to an overseas programmer or a foreign company doing sales work for you, that money has to be accounted for. What paperwork has to be filed so that the IRS knows that someone in India has that $300, so you won't be taxed on that as personal income? And is up to the oustsourced employee or contract worker to report their income to their own government?

[mjwalshe]

Huh

how a payment to a 3rd party come out of your personal income?

[LifeinAsia]

If it's under $600, you do not need to file a 1099. It's not different than if you paid someone in the US $300 for a project. Since it's extremely doubtful that you sent $300 in cash to India, you obviously have some sort of paper trail for documentation (wire trasfer, etc.).

[stajer]

NO 1099 is required for forgein payments. When you do your personal taxes, you will file a schedule C which is a summary of income and expenses from a personal business. The net income will be added to your AGI on page 1 of the 1040.

[DXL]

NO 1099 is required for forgein payments. When you do your personal taxes, you will file a schedule C which is a summary of income and expenses from a personal business. The net income will be added to your AGI on page 1 of the 1040.

Thanks for the explanation.

Do you have to prove that you paid X amount of dollars to a foreign designer, though? If you're not going to 1099 a foreign designer that you hire on a contract basis, how does the IRS know who got payments from you and for how much?

[syber]

If you're not going to 1099 a foreign designer that you hire on a contract basis, how does the IRS know who got payments from you and for how much?

You should have receipts such as a check stub. You don't need to file a 1099 because the IRS cannot tax the foreign worker.

[jtara]

Do you have to prove that you paid X amount of dollars to a foreign designer, though? If you're not going to 1099 a foreign designer that you hire on a contract basis, how does the IRS know who got payments from you and for how much?

How do you prove that you bought $1000 in supplies at Office Depot?

Same way.

[DXL]

I'm asking more along the lines of how do you prevent an audit as opposed to how do you prove what you spent that money on in the event that you're audited.

I could obviously keep a receipt for a wire transfer, but I also don't want to go through the trouble of being audited in the first place.

[LifeinAsia]

how do you prevent an audit

You don't. The only absolute way to not get your business audited is to not do the business in the first place.

You can try to avoid obvious red flags, like having huge losses year after year. Also, do a reality test for your industry- if you're a web designer, you're most likely not going to have $50,000 in travel expenses; if you're a limo driver, you're most likely not going to have $50,000 in office supplies.

On your tax return, there is no line marked "Amounts paid to foreign nationals" so the IRS won't know from looking at your return whether the amount you enter under "Contract labor" is all to one programmer in Indiana or 10 programmers from India.