If a US entity pays a foreign Contractor for services performed, the US entity claim the foreign contractor payments and deduct them as legitimate expenses on their U.S books and tax return.

According to the IRS Publication 515, The US would not tax non-residents on income derived from personal services that are performed outside the US. This would also mean that the income will be a foreign source income and withholding would not be required.

US entities can hire offshore employees at anytime. Offshore employees would not have US tax withholding or tax reporting if the employee would be performing the services outside the US.

IRC 3401(a)— defined wages as “all remuneration (other than fees paid to a public official) for services performed by an employee for their employer including the cash value of all remuneration (including benefits) paid in any medium other than cash…”

Reg 31.3401(a)(6)-1(b) provides that “remuneration paid to a NRA for services performed outside the US is excepted from wages, and hence is not subject to withholding”

A W8 form should be completed by the Foreign Person/Entity receiving such income, this form validates that the payee of such income is a Non-Resident Alien performing the service outside the United States.

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