Discussion:Outsourcing to outside US
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Discussion Forum Index --> Advanced Tax Questions --> Outsourcing to outside US
Discussion Forum Index --> Tax Questions --> Outsourcing to outside US
Ansdkfus13 (talk|edits) said: | 16 July 2008 |
| We just incorporated our company and are planning to outsource website development to Ukraine in Eastern Europe. Since it's a contract job and a deductible expense for our business, we need to report it somehow. However, since they are not located in the US, we do not file 1099 right? I came across two forms that might be relevant to our case: W-8BEN and 1042-S. Which one do I file or both? I understand that W-8BEN is a form that proves the developer is a foreign entity and 1042-S is for tax withholding purposes for agents. Do I withhold tax for the services provided by the website developer in Ukraine? When exactly do you file 1042-S? This is how I understood, correct me if I'm wrong: 1042-S applies when the money is a US source income, which means either the foreign entity has US presence or they made that income with the properties in the US such as capital gains from selling of US stocks?
I'm extremely confused and calling IRS people does NOT help!! They kept transferring me to another department and my call dropped several times. Finally the department I wanted to reach was closed for the day... This is frustrating. Can someone help!!
Thanks Arianne | |
Ansdkfus13 (talk|edits) said: | 16 July 2008 |
| Please give me some advice!!! | |
| 16 July 2008 | |
| Our advice is for you to seek a local tax professional. Inquire first whether they have any experience in this area - many will not.
this site is for tax professionals to discuss issues amongst ourselves, it is not to dispense free advice to people who should be clients of one of us | |
| 16 July 2008 | |
| Kevinh - you beat me to it -I was answering your message to me. | |
| 16 July 2008 | |
| Have the non-U.S. developer fill out Form W-8 BEN. None of the boxes need to be checked - the developer is just certifying that it is a non-U.S. person. Form 1042 and 1042-S are not needed. They only apply to U.S. source income. If the services are being performed outside the U.S. the income will be foreign source income. No 1099 is needed. | |
Ansdkfus13 (talk|edits) said: | 16 July 2008 |
| Thank you Smktax. I'm not a tax professional but my college major is accounting. So hopefully I am qualified to speak on this forum site.
Btw, I, after several hours of being transferred and having calls dropped, managed to talk to an IRS customer rep who could walk me through what to do in this situation. The following is what I told my developer to do. "I finally talked to an IRS customer rep. and he kindly walked me through all the processes. Please go to the following URL and look for article 7 Business Profit. These are income tax treaties between US and Germany and US and Ukraine. It just means that according to the treaty with Ukraine or Germany, all business profits you reap from the US are taxable in your home country not in US. Then, we don't need to withhold tax for you. http://www.irs.gov/pub/irs-trty/germany.pdf http://www.irs.gov/pub/irs-trty/ukrain.pdf However, for us to prove that you are indeed a foreign company, we need you to fill out W-8BEN. For you to fill out this form, you need a US EIN, which can be obtainable by mail, fax or phone. Mailing option takes 4-6 weeks, so I recommend using either fax or phone. By fax it takes about 4 days to get EIN and by phone you can get an EIN instantly. 1. Download the document (Form SS4) at http://www.irs.gov/pub/irs-pdf/fss4.pdf 2. Either fax at 1-215-516-1040 or call 215-516-6999 3. With the EIN you received, complete W-8BEN and return it to me. Question for Smktax The IRS customer rep said unless we have a valid US EIN of the developer on the form W-8BEN, the form might be proven ineffective during the audit. Then we will end up paying 30% of what we paid the developers. And on the form SS4, it requires you to fill out either SSN, ITIN or EIN. Since they don't have SSN and are doing this to get EIN, only option left is ITIN. Do I also have to have our developers to get ITIN as well?? Thanks Arianne | |
| 16 July 2008 | |
| No need for the developer to get an EIN. This would unnecesarily complicate the situation. The W-8BEN is not filed with the IRS. It is your proof (if you are ever audited) that you are paying a non-U.S. person. Unless you have some reason to believe that the services are taking place in the U.S., as long as you have the W-8BEN signed by them there is no need to withhold. You may not even need the W-8BEN. I usually suggest that you get one though. | |
