Paying Foreign Independent Contractors With Tax In Franklin
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“U.S.-source compensation payments made by a U.S. business to a non-U.S. individual who is an independent contractor and who is not treated as a U.S. tax resident for the taxable year will generally be subject to 30% gross withholding.”
Conversely, if the independent contractor is not a US person and did not perform any of their services within the US, you will not be required to issue Form 1099. Instead, the foreign contractor will have to complete and file Form W-8BEN.
The IRS requires a flat 30% withholding on ALL types of payments to foreign national individuals UNLESS: The individual has a U.S. tax identification number (SSN or ITIN) and qualifies for a tax reduction under the tax treaty between the U.S. and their country of tax residency.
Self-employment Tax: Even though the Canadian company doesn't issue a 1099,you are still responsible for reporting all your income, including this, on your US tax return. You'll need to file Schedule C as part of your Form 1040 to report the income as self-employment income.
A Canadian company should make sure it doesn't have a permanent establishment in the United States in order to avoid paying withholding tax in the United States. In addition, filing Form W-8BEN-E can assist in determining the foreign status of the company and enabling it to claim any relevant tax treaty advantages.
If you're a sole-proprietor, self-employed or a certain type of partnership, you must fill out your T1 General, that's your standard personal income tax return. You must also complete a separate T2125 “Statement of Business or Professional Activities”. This is where you specify: Business and professional income earned.
As a proprietor of that business, you should file your independent contractor taxes on a Schedule C (Form 1040) to properly report your income and claim related expenses. To calculate the self-employment taxes mentioned above, you'll use Schedule SE.