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I have a LLC based out of MD. I got a contract for a US based company, but a portion of it is outsourced to India. Can I pay them with funds in India, or should I transfer from a US based bank, once they Invoice me?

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I assume that the funds in India are not LLC funds but your personal, right? In this case, you can use them for payment, but you need to account for them (as a contribution of funds) on your LLC books.

Note, that you still need to withhold 30% (or per treaty), and remit that to the IRS, and they expect US dollars. (and if you're trying to work around that, then don't. Don't mess with IRS).

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Thanks for the response. Yes, personal funds in India. However, here's the scenario. Please indulge me for my understanding: I get $100 from the company I'm contracting with. I pay $40 to the contractors, so isn't that cost? and I pay tax (30%) on the $60 remaining? – Sri Sep 4 '12 at 18:48
One thing the company in India is registered and based there. They freelance here in the US. – Sri Sep 4 '12 at 18:49
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@Sri that's why you're required to withhold 30%, and if you don't - IRS will come after you. The 30% is on the money you pay them, in your scenario: out of $40 they're supposed to get, you withhold 30%, and remit to the IRS. That's their taxes, that you are required to withhold. Your $60 will appear on your regular yearly tax returns as usual. – littleadv Sep 4 '12 at 18:53

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