One way that US companies are accessing top talent is by hiring foreign contractors, rather than looking for US employees with the required skills. These are referred to as “1099 contractors” since Form 1099 is the tax form that the IRS requires companies to file when they pay any contractor over $600 per year.
The 1099 filing typically only applies to US-based contractors, but there are exceptions to this rule, such as when a foreign contractor performs any services on US soil. In that case, a 1099 is required along with tax withholding for those contractor payments.
Pros of Engaging Foreign Workers as 1099 Contractors
There can be some real advantages in hiring foreign contractors rather than full-time US employees. The most obvious is that a company can access a global talent pool to meet their project needs or for technical support. Here are a few other benefits:
Managing US Tax Liability
If a company hires a foreign contractor that only performs work in their home country (not the US), then there is no US tax liability or filing requirements for the company. This means that only payment needs to be remitted to the contractor, and they will handle their own tax payments at home.
Similar Treatment as US Employees
The foreign contractor can be managed and integrated into a remote team along with the US-based employees, allowing for time zone differences. The fact that they are paid as contractors will not interfere with the way they deliver services or participate.
Short Term Commitment and Project Duration
A key advantage in hiring any contractor is that they can be engaged for a short period of time with no commitment beyond the contract terms. This is ideal for finite projects or periodic work on as-needed basis, and the same contractor can be engaged for multiple engagements.
Contractors typically have fewer rights than employees, which limits a company’s exposure to lawsuits and employment rights claims. The contractor relationship in most countries is seen as a business to business service, and is only subject to the contractual rights and duties spelled out in the agreement.
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Cons of Engaging Foreign Workers as 1099 Contractors
While the advantages are clear, there are some cons to this practice, and the downside has to be evaluated carefully. Here are the disadvantages to hiring foreign contractors:
Is it legal to engage foreign workers as 1099 contractors?
As long as the contractor relationship is well defined in a written agreement, it is legal in most countries as well as the US. However, there is increasing scrutiny of the practice due to overuse of contractors in some sectors, and it pays to know the laws of the foreign contractor’s residence, as well as the local regulatory climate.
Host Country Regulations on Social Security and Pensions
As an independent business, a contractor should be responsible for their own social security and pension payments. But, some countries do impose a contribution on the hiring company to ensure adequate payments.
Contractor Tax Payments
It can be difficult to monitor if a contractor is making tax payments at home, and it may be wise to ask for some proof of local tax compliance on a regular basis from the contractor.
Anytime that a company hires a foreign contractor, they should be aware of any compliance risk in the host country. Every country approaches the contractor relationship uniquely, based on local policy and regulations. Basically, it a cross border business arrangement, but may blend into some labor and contractual laws that must be followed.
Another potential costly pitfall is if the contractor is misclassified in the host country, and is actually an employee under local laws. This could mean that the company would be liable for unpaid wages, vacation pay, benefits and severance in case of termination.
Not Ideal for Long Term Engagement
Because the contractor/employee definition revolves around control and length of service, contractors should not be hired for long engagements. This could lead to the misclassification problem, and the contractor could even initiate their own claim for employee status and benefits.
Contractor May Prefer Employment Relationship
Many contractors will accept an engagement with the hope of becoming an employee, and it is not a bad way to give a foreign worker a trial run before hiring. However, if you have no intention of offering employment, that should be made clear from the start, and included in the contractor agreement.
The Shield GEO Solution
As you review the pros and cons of hiring foreign contractors, it becomes apparent that there are some significant risks that may not be offset by the advantages. The good news is that there is a solution to minimize the disadvantages while preserving the benefits of hiring contractors. Shield GEO can assist US companies with hiring foreign workers in over 90 different countries, using our local employer of record to administer the work relationship.
What this means is that the foreign worker becomes an employee of Shield GEO’s locally registered entity in their home country, that is already in full compliance with employment, payroll and tax laws. The Shield GEO solution avoids the misclassification risk of using contractors and ensures full adherence to all local regulations. Tax withholding is made accurately along with statutory contributions, and an employment contract is drafted that meets the host country standards.
The Shield GEO solution can be used for engagements as short as three months, or works equally well for long term employment. The company gets the best of both worlds, access to global talent for their remote team, without the downside of hiring a contractor in an unfamiliar and distant country. Our local partners and experts handle all aspects of onboarding and administering the GEO employee, and can have the worker engaged within a matter of days.