Personal Finance

NewYorker · Guest

I have a LLC located in US. I'm using some foreign
programmers for my project. The problem is, I can't
transfer the money thru a bank to those programmers. The
way of doing business with that country, most people do, is
to give US Dollar to relative or whoever going back to that
country.

Here's my question, can I still claim those wages as tax
deduction?

TIA.

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Dick Adams · Guest

"NewYorker" <newyorker777@hotmail.com> wrote:

Hank Murphy · Guest

"NewYorker" <newyorker777@hotmail.com> wrote:

Guest · Posted: Fri Nov 11, 2005 9:00 am Post subject: Re: Foreign Wages

Playing Devil's Advocate, Seth wrote:

Seth Breidbart · Guest

Dick Adams <rdadams@smart.net> wrote:

Hank Murphy · Guest

"Seth Breidbart" <sethb@panix.com> wrote:
<snip>

Shyster1040 · Guest

""But I think you will have to give the "relative or
whoever" a 1099, and they will have to pay US taxes on it.""

If the work were done offshore, then the compensation for
such work is not US-source, in which case it is not subject
to tax by the U.S. unless the person performing the services
has an office or other fixed place of business in the U.S.
and that income can be attributed thereto under 864.

In terms of withholding & reporting, the issue gets a little
dodgier.

As to withholding:

First, since the work was performed offshore, the pay is
non-US-source, meaning that either (a) there is no
withholding obligation if the payee is foreign, but (b)
there may be wage withholding under 3401 if the payee is
treated as a U.S. person.

Here, in the absence of a Form W8-BEN, the payor would have
to treat the payment as being made to a U.S. person (and
thus subject to wage withholding), except that, if the
payor's communications with the payee are mailed to an
address in a foreign country, then the payor may presume
that the payee is foreign in the absence of a W8-BEN.

Here, provided that the payor sends some sort of official
work-related communications through the mail to a foreign
address, he should be able to presume that the payee is
foreign (which just makes sense - here the regs manage to
get, in a round-about way, to the sensible solution), and
that therefore there is no wage withholding.

The one wrinkle is the payment in the U.S. to a relative who
is physically present in the U.S. Such a payment would
generally be treated as being made to a U.S. person unless
the payor has actual knowledge that the beneficial owner is
a foreign person. Here, since the issue is actual knowledge
(and not presumptions in the absence of a W8-BEN), the payor
appears to have actual knowledge, and so can avoid the
presumption that payments in the U.S. to the rellies of his
foreign programmers are made to U.S. persons.

Reporting:

Here, we have a payment of non-US-source income to a
(presumptively) foreign payee. Thus, under Regs 1.6041-4
and 1.6041A-1, no reporting is required under Sec. 6041
because, even though this is a payment for services received
by a person in the course of his trade or business, no
reporting is required if the payee is presumptively foreign
(in effect, if it's a payment to a foreigner, then the Sec.
6041 rules defer to the Sec. 1441 rules).

Since no withholding is required under Sec. 1441 because
this is the payment of a foreign-source item to a
(presumptively) foreign payee, no reporting is required
under Sec. 1461 and Reg. 1.1461-1.

Thus, in the facts as given, provided that the payor
communicates by mail sent to the workers at a foreign
address, he can presume that they are foreigners for both
withholding and reporting requirements, and is not required
to either withhold on or report such payments.

As to deductibility, if the payments are otherwise ordinary
and necessary, and provided that adequate records are kept,
the mere transfer of cash to a middleman (aka "courier") to
carry overseas to the ultimate payee is not in itself
sufficient reason to render the payments nondeductible.

There is, however, the question of whether a payment in this
manner would be treated as an "other illegal payment" under
Sec. 162. I have no idea, however, whether there is any
federal or state law that would, without more, subject our
payor to either criminal penalties or the loss of a license
or permission to engage in his trade or business because
these payments were made in cash rather than by wire
transfer or cheque. I rather doubt it, however.

<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org. >>
<< Copyright (2005) - All rights reserved. >>
<< ======================================================= >>

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