What are the US laws governing taxation of remote employees from other countries?

You never ever want to hire overseas employees, regardless of what US law has to say about the subject -- worry about the laws of Venezuela, Philippines etc instead. It potentially brings a huge overhead with regards to overseas tax withholding rules and foreign legal system.

There are 2 common routes when you're engaging with specific people you like that live in a foreign country:

• The overseas guy(s) have set up a small company (LLC, sole proprietorship) from which to do business. You hire this company to do work for you; on a time and materials or project milestones basis.

• For larger and longer running / permanent teams: You engage with a company which specializes in offshore / outsourced development. You contract with this company based on a legal framework, and a statement of work which specifies which team size and skills/positions you're looking to fill. The overseas company then finds potential employees, present them for your approval, and finally hires them, provides office space, IT infrastructure, HR services, handles legal matters regarding employment, etc.

In both cases you're simply engaging with an overseas company, so you get a regular invoice from a company (possibly with a VAT number in some jurisdictions), which you pay. The relationship is your company --> overseas company --> overseas employee.

Though I have not done it myself and tend to prefer hire US-based folks (less headaches over legalities, IP issues, etc. etc. etc.), I've had clients I worked with who did have "employees" in other countries. They usually treated them like corp-to-corp, so all the payments and agreements were made between companies. Foreign "employee" would form his own company in the country of residence and taxes/compliance were their headache.

Another point, especially with EU countries, tax and employment laws are MUCH tougher. So take the costs of compliance and additional effort needed into account.

If you are doing this by yourself you will have to hire them as an Independent Contractor (IC), which means you just pay the stipulated rate per hour which just goes straight to your expenses, no taxes.

The IC is responsible for local taxes in their country or state and you do not have to worry about taxes at all. Just make sure you get a standard IC contract off the internet (free on a lot of sites) that states they are responsible for employment taxes.

I have a virtual staffing company based in the Philippines. We are incorporated in the Philippines and in America. If you contract with us, you contract with an American company, again it is a direct write off. The Filipino company pays all the local employment taxes there and that does not impact the American company at all.

Hope that helps.

The consensus is clear - do a corp to corp contract and hire any one in any country. There are situations where the foreign worker should not be a "contractor" for perception reasons. The foreign worker living in a foreign land and working from there is not governed by US Laws and US Corporation not registered to do business in a foreign land has no statutory obligations in that land. Therefore, only the laws of the land in which the worker lives has to be complied with - if the country states that foreign corporations employers have obligations in their country if local nationals are employed, there is a compliance requirement. If such a requirement is not there, which in any case is difficult to enforce, there is no reason not to employ a foreigner in his or her own country.

I do not believe there are any major issues on the US side when hiring foreign contractors. They really are considered contractors. The US does not care too much about the taxes paid or not paid in the foreign country. The only difference is that the IRS may be more rigorous about making sure that the person really is working for you and it's not just a friend you are sending money to. So if you were audited you may be required to show proof of all the work that this foreign contractor did for you. If the IRS suspects they are related to you in some way you might be in trouble.

On the foreign side, you just need to make sure they are considered contractors and not employees. That varies between countries, but really you need to make sure that your contract shows that they are a contractor. If you have an office and presence in the foreign country you might be open to some kind of action from the foreign country tax office.