When you use international developers directly (who want payment directly to their bank accounts) should I worry about US tax (Fed and State)? These developers will be assisting me with an external consulting project for a US based client who will be paying me directly. I have an S Corp registered in GA. For example, let us say, my client pays me $100 and I perform work for $40 and pay international developers $60 for remaining work, am I liable for tax on $40 or the entire $100?
Assuming you invoice 100$ to your client, that's your revenue / taxable income (the entire amount).
The 60$ you pay to developers is an expense / wage to subcontractors.
I'm based in Canada though, so don't take this as accounting advice.
Digital Strategy and WordPress Consultant and Trainer
February 6th, 2014
I would consult a tax attorney, but at the end of the day, it's a pass
through. Whatever expenses you have, you note on your schedule C as an
expense, so that you don't have to pay taxes on those payouts.
I Am Not An Accountant (or Tax Lawyer), but I am in exactly the same
situation and I treat it like this:
The cost of an overseas developer is a professional services expense.
Therefore it is subtracted out of my revenue ($100 in your example) before
determining my net income ($40). I pay tax on my net income, the $40 in
I've been told by my CPA that this is totally kosher, and that it is up to
the overseas developer to handle his own tax obligations...unless he's a US
citizen, in which case I'd need to issue a 1099 to him.
The $60 that you pay for the contractors is an operating expense. So you end up paying taxes for $40 that you earn. These people are not your employees but consultants so you dont have to pay any payroll taxes. Make sure that you get all the bills from contractors to show that expense.
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Jonathan nailed it. You invoice 100, are responsible for that. Obviously, if at the same time you have expenses of 60 that puts down profit. And raises a big flag too. Tax liability over the 60 is another matter. What you want is to be liable for only 40. You can do that, if you agree with your partner has to pay those 60 as "expenses". But that way he will know the difference. This can work if you charge 100 with 10/20 expenses but never 40/60. The tax man is not going to accept that. So, just keep on going.
Technical Leader - Software Engineering | Architecture | Product Development
February 6th, 2014
Just have them send you a bill with the foreign address and payment instructions so you are covered. You are likely to receive a call from your bank asking to explain all these wires especially if they go to individual accounts.
Good question Joseph. Whether you pay tax on your profit is probably the easiest question to answer here. What I think you also need to know is whether you are obligated to pay payroll taxes, or if there are any other reporting requirements if you are sending money directly to someone overseas. If they are consultants, probably no payroll tax, but usually a consultant needs to fill out a W-9. Does that apply in your case? If not, there must be another document otherwise you will have difficulty expensing those costs later on.
Owner/Fullstack Architect at IdeaNerd LLC
February 6th, 2014
You can list the $60 as expenses. (Some companies just want to lump "salary" and expenses into one big bucket. That means its up to you to split it up) Just have a clear paper trail. You may have to submit paperwork to the countries where the developers live. I've done the same but with US-based developers. I submit paperwork so they get their 1099 and IRS knows how much they made from me. In fact, I think the law is that you must submit the required paperwork if you pay someone, event a contractor, more than $600 in a year.