My US corporation has engaged a sole proprietor in India as a contractor for an upcoming project. He has worked for us for several years but previously through a US company and has just this year gone out on his own. My tax department has told me that there could be issues with taxation but they do not have the resources to investigate. Would we just pay him similar to a 1099 contractor with no taxes taken out and he would owe taxes to the Indian government or do we have an obligation to pay any US taxes on his behalf?

auburnsun:

I am going to attempt to help you here, although I must inform you that foreign taxpayers and/or entities are not my area of specialization.

In general, trade or business in the U.S. for personal services provided to a U.S. business and or individual, even when the person providing the service is not present in the U.S. (Code Sec. 864(b)) - Your sole proprietor would need to file a form 1040NR.

To ensure payment of taxes that MAY be due, foreign individuals are generally subject to a flat 30% withholding by the withholding agent (your company) (Code Sec. 1441 and 1442).

Beyond that, withholding agents must file an annual information return on Form 1042-S to report income paid to a foreign taxpayer that is subject to withholding. (Reg. Sec 1.1461-1 and 1.6302-2) These forms must be filed by March15, and a separate one must be filed for each recipient.

Hope this gives you at the least a place to start.

In general, trade or business in the U.S. for personal services provided to a U.S. business and or individual, even when the person providing the service is not present in the U.S. (Code Sec. 864(b)) - Your sole proprietor would need to file a form 1040NR.


This is entirely incorrect. Services provided "in" the U.S. are treated as engaged in a U.S. business, but providing services outside the U.S. would not be treated as a U.S. business.


To ensure payment of taxes that MAY be due, foreign individuals are generally subject to a flat 30% withholding by the withholding agent (your company) (Code Sec. 1441 and 1442).


Again wrong. The withholding tax is only imposed on "U.S. source" income. Services are sourced to the location that they are performed. Since they are performed in India, no withholding tax should be imposed.

You should pay the India sole proprietor as a 1099 contractor and you don't even need to send him a 1099. You may wish to get a Form W-8BEN from him to certify that he is a foreign person but the presumption rules likely provide a similar result without the W-8BEN.

IntlTax is correct.
If a foreign person worked in a foreign country for a U.S. firm, the person is not subject to U.S. taxes. So you must check residence status of the person. Get W-8BEN to confirm foreign status.

If you are making payment from U.S. for a U.S. firm, you do not have any India tax requirement.

Thank you both for the follow-up and catching a subtlety I misread.

I definitely had the first part of my answer incorrect.

Apparently, I assumed since the independent contractor had previously worked for a U.S. company, and by nature of the contractors that I usually deal with, was doing the work in the U.S.

- Obviously, details are so important.