Outsourcing to foreign country (independent contractor)

[KJ Judd]

Met with a new client today. He is starting IT business and will outsource a portion of the work to independent contractors in a foreign country (Pakistan, I believe). I haven't dealt with payments to individuals or businesses in foreign country before.

1. I conclude this is an ordinary & necessary business expense and thus deductible on his tax return. Agree?

2. Is there any information reporting needed? Since the contractor isn't in the U.S., I wouldn't think he'd need to issue a 1099-MISC.

3. Any other things I should be aware of?

[DTS]

Int'l sales

KJ,

I use to work for an attorney who did a great deal of int'l brokering of goods. I don't know if these items pertain to "services", but they did to "goods". They are:

1. Contract of Sale, which will describe all the pertinent information of the relationship.
2. Letter of credit, which will be your client's bank guaranteeing funds will be paid to the foreign individual providing certain conditions are met.
3. Bill of lading (I believe this is for goods only)
4. Commercial invoice, which lists the items or services sold.
5. Draft, which is from the bank ordering it to pay.

Like I said earlier, I don't know if this pertains to services, but if this was my deal, I would go to my bank or a large bank where int'l deals are done and they can verify all this or whatever will be needed to make this work out for all parties.

I hope this helps in some small way.

Dennis

[OldJack]

2. Is there any information reporting needed? Since the contractor isn't in the U.S., I wouldn't think he'd need to issue a 1099-MISC.

You probably have to file form 1042-S in place of form 1099, 1042-T in place of form 1096, and 1042 in place of form 941. See instructions for the forms.