There have been scores of new regulations handed down since President Trump assumed office, and one bill – governing the H1B employment visa – has been the topic of much discussion here on Art Law Journal. introduced this week into the House of Representatives, could have sweeping implications for artists and arts business owners.
In our last post, we reviewed some of the ways artists might be affected while providing a useful guide for small business owners who employ H1B visa workers. Structuring the right relationship, complete with contract clauses that outline the foreign worker’s role as an independent contractor and practical, real-world applications that govern your relationship were outlined. In today’s post, we’ll review tax implications associated with foreign workers, as well as corporate structures and Securities and Exchange Commission implications that could arise from those relationships.
Here’s what artists, graphic designers, and arts business owners need to know about the future of work in the United States.
The H1B Visa and its Proposed Changes
The United States offers foreign workers a variety of possibilities for finding legal work opportunities in the U.S. Some are permanent work positions, while others are only temporary visas that allow a foreign worker to enter the United States for the purpose of employment. A visa guarantees the recipient employment for a fixed period of time, rather than being considered indefinite. These visas require prospective employers to first file a petition with U.S. Citizenship and Immigration Services before they can apply for a work visa – meaning a potential employee basically has to have an offer from an employer locked down before they can begin work.
The H1B visa is one such visa – defined as a ‘specialty occupation’ visa, the visa is issued to highly skilled workers who possess a higher education degree and display an extraordinary talent within an industry. The H1B visa is the most common work visa issued in the United States – it’s estimated that more than a million H1B visas are issued per year.
However, the new presidential administration is seeking to curb the H1B visa requirements to make it more difficult for companies to hire foreign workers. Proposed by several Republican leaders, the new rules would more than double the minimum salary requirement for H1B workers – currently, to qualify for an H1B visa, a company mist be willing to pay a qualifying worker a minimum salary of $60,000 annually. Under the new regulations, companies would be required to pay a minimum of $130,000 annually. The $130K proposal only applies to H1B dependent employers (i.e. those who have 15% of their workforce on an H1B). There is no mention of any skills-based criteria/requirement in the proposal. However, the proposal does earmark 20% of H-1B visas for small and start-up employers, but will also prohibit companies with more than 50 employees, of which at least half are H-1B holders, from hiring additional H-1B employees.
In addition to being on the floor of the House, there are many that claim President Trump will be signing an executive order to establish these exact policies, thereby bypassing the need for the measure to go to a vote. If it passes, scores of H1B workers will be required to give up their jobs and exit the country immediately.
In light of the H1B visa crackdown, we’re recommending that companies who wish to continue working with foreign workers forgo hiring them as employees, and instead structure independent contractor relationships with foreign workers.
Tax Implications When Hiring Foreign Independent Contractors
As we reviewed in our last post, it’s perfectly legal to hire foreign workers for independent contractor work in the U.S., so long as you stick to U.S. laws governing your work relationship. As we reviewed, an independent contractor is a person that works temporarily with minimal supervision and plenty of autonomy. It’s important not only to have a detailed contract that explains your relationship with a foreign worker but a working relationship that definitely does not amount to an employee-employer relationship. In general, the foreign worker shouldn’t be held to a particular schedule, shouldn’t work for you exclusively, and shouldn’t use significant company resources in order to get the job done.
Assuming you’ve got an appropriate relationship structured with your foreign worker, you may be wondering what your tax obligations are under the arrangement. In the U.S., employers must report employee income or freelance payments to the IRS once the amount paid surpasses $600. However, when you’ve hired a foreign independent worker, then the rules are a little different. Naturally, since the foreign worker does not live in the U.S., they would not be obligated to pay any local U.S. taxes. However, that doesn’t necessarily mean that you won’t be held accountable for making some kind of tax declaration. After all, foreign workers will be required to file taxes in their own countries.
In order to avoid any issues, companies will have to check the tax requirements and accompanying laws in the country in which the freelancer resides. Some countries establish additional benefits or tax requirements for workers when they are employed with a company for a certain amount of their overall time. For example, an independent contractor in Spain who spends 75 percent of their week working with one particular client must be provided benefits like time off and severance pay – which would wind up costing you more in the long run.
In addition, hiring a foreign worker as an independent contractor means you’ll need to determine whether that person is a U.S. resident for reporting purposes. For example, if you hire a foreign work who is an ex-pat living abroad, then you will be required to take additional steps in order to report their income with the IRS. In order to do so, you’ll need to have the independent contractor sign and complete form W-8BEN, which will require the worker to confirm that they are not a U.S. resident.
The good news is that companies who hire foreign workers who have no established presence in that country will likely not have to withhold any reporting taxes for that person. For example, in the UK and Thailand, a company that doesn’t have a permanent establishment locally or doesn’t have some presence in those countries, can hire and pay local workers without making local withholdings and contributions. So, if you’re a U.S. company whose only tie to Thailand is the foreign worker you employ there as an independent contractor, then you won’t have to worry about reporting or withholding taxes for that employee. Instead, The worker will bear the burden of tax and any social security filings as if self-employed or a short term freelance worker. On the flip side, if you are a U.S. company employing a U.S. worker as an independent contractor, you would be required to file a 1099-MISC and report any payments you make to that contractor, so the IRS can keep track of what the contractor owes on their end.
Of course, this will always depend on the laws of the country, which is why its very important to have a good grasp on what your legal obligations may be. And for a small creative company, this can sometimes be daunting. Just because those employees are in another country does not alleviate the company’s responsibility for reporting income to foreign governments. More importantly, just like in the United States, there may be steep fines or even criminal liability for not reporting income.
Another consideration requires an analysis of where the work is performed. If the foreign worker is performing his duties in his country of residence, then any compensation paid to that worker is not considered ‘wages’ by federal tax law and is therefore not subject to withholding. However, if they do come to the U.S. to work at some point – say, for a meeting or for a month to meet the team and get better at working together – then that might be a different story.
Finally, issues might also arise if the foreign worker is paid via his corporate entity or LLC. For example, if the foreign worker lives abroad but has a corporation set up in the U.S. in order for the worker to keep a U.S. bank account, he will likely request to be paid via that entity. In most instances, the same rules will apply to the entity as they would to the foreign worker – if the foreign worker is based abroad, then you won’t be required to report or withhold taxes in the U.S.
Hiring Foreign Workers Makes Financial Sense, and Paying Them is Easy
While it can be time-consuming and somewhat confusing to hire foreign workers as independent contractors, there are a lot of financial benefits to doing so. Assume you’ve decided you’d like to hire foreign workers in Argentina, where the cost of living is substantially lower than the U.S., and many on-the-ground creatives are either fully fluent in both English and Spanish or ex-pats living abroad. You’ve spent an initial amount of funds on speaking to a lawyer and determining what your tax obligations might be if you employ an Argentine citizen or a U.S. person living in Argentina.
After you’ve determined what’s required, you’re free to hire as many independent contractors as you like, and generally speaking, these workers are demanding extremely competitive rates for your U.S. business – you’re paying them a more than livable wage that’s likely substantially less than what is considered acceptable for U.S. cost of living standards, and they’ve got the peace of mind of working with a U.S. company and being paid on time.
You might be asking yourself whether it’s easy to make payments to a person who’s located outside the country, and while the process hasn’t always been easy, its increasingly become so thanks to online services like PayPal.
Traditionally, companies employing foreign workers had to pay their independent contractors via international wire transfer, which was not cost-effective for most companies, who had to bear the costs of both local and international bank fees for completing the transaction. Today, companies have PayPal. As of December 2016, PayPal is available in over 202 countries. PayPal charges the receiving worker 3.9 percent of the total fee. It also allows the company to send payments using a corporate credit line, which is attractive for smaller businesses. PayPal also has a more advanced business solution called PayPal MassPay, which allows payments to be made to multiple payees by uploading a file with all of their information simultaneously. The fee is paid by the sender, but the fee is a maximum of $20 for an international receiver. MassPay has even lower fees than regular PayPal. To send money to a receiver in the US, it only costs a maximum of $1, while it costs a maximum of $20 for an international receiver.
So, while the legal and tax implications may seem prohibitive at first, hiring foreign independent contractors might just be an extremely cost-effective solution for your business – especially in light of the new H1B visa requirements.