offshoring work and tax dilemma
Generally for tax questions you should talk to a tax adviser. Don't consider anything I write here as a tax advice, and the answer was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Does IRS like one payment method over other or they simply don't care   as long as she can show the receipts? They don't care as long as she withholds the taxes (30%, unless specific arrangements are made for otherwise). She should withhold 30% of the payment and send it to the IRS. The recipient should claim refund, if the actual tax liability is lower. It's only consulting work at the moment, so most of the communication   is done over phone. Should they start engaging in written   communication to keep records of the work done? Yes, if she wants it to be a business expense. Is it okay to pay in one go to save money-transferring fees? Can she   pay in advance? Again, she can do whatever she wants, but if she wants to account for it on her tax returns she should do it the same way she would pay any other vendor in her business. She cannot use different accounting methods for different vendors. Basically, she has not outsourced work in previous years, and she   wants to avoid any red flags. Then she should start by calling on her tax adviser, and not an anonymous Internet forum.
I think companies should be able to reduce their tax burden to zero as long as they produce a net benefit to their host country. Taxes for corporations should be ways of influence and reducing cost of having the business in the country due to externalities like pollution and influence things like against outsourcing. It depends and I would not just jump into conclusion as I have seen cases where offering some services are not U.S. sourced income. I'll advise you speak with a knowledgeable tax professional. What I'm going to write is far too long for a comment, so I'll put it here even though its not an answer. That's the closest thing to an answer you'll get here, I'm afraid. I'm not a tax professional, and you cannot rely on anything I say, as you undoubtedly know. But I'll give you some pointers. Things you should be researching when you have international clients: Check if Sec. 402 can apply to the pension funds, if so your life may become much easier. If not, and you have no idea what you're doing - consider referring the client elsewhere. You can end up with quite a liability suit if you make a mistake here, because the penalties on not filing the right piece of paper are enormous. "If you're a US citizen, money earned while in the US is sourced to the US. So you can't apply FTC/FEIE to the amounts attributable to the periods of your work while in the US even if it is a short business trip. Tax treaties may affect this. Most tax treaties have explicit provisions to exclude short trips from the sourcing rules, however due to the ""saving clause"" these would probably not apply to you if you're a US citizen - you'll need to read the relevant treaty. Your home country should allow credit for the US taxes paid on the US-sourced income, and the double-taxation avoidance provision should apply in this case. The technicalities depend on your specific country. You would probably not just remove it from the taxable income, there probably is a form similar to the US form 1116 to calculate the available credit." This question came up again (Living in Florida working remotely - NY employer withholds NYS taxes - Correct or Incorrect?) and the poster on the new version didn't find the existing answers to be adequate, so I'm adding a new answer.   NYS will tax this income if the arrangement is for the convenience of the employee. If the arrangement is necessary to complete the work, then you should have no NYS tax. New York state taxes all New York-source salary and wage income of nonresident employees when the arrangement is for convenience rather than by necessity (Laws of New York, § 601(e), 20 NYCRR 132.18). Source: http://www.journalofaccountancy.com/issues/2009/jun/20091371.html Similar text can also be found here: http://www.koscpa.com/newsletter-article/state-tax-consequences-telecommuting/ The NYS tax document governing this situation seems to be TSB-M-06(5)I. I looked at this page from NYS that was mentioned in the answer by @littleadv. That language does at first glance seem to lead to a different answer, but the ruling in the tax memo seems to say that if you're out of state only for your convenience then the services were performed in NYS for NYS tax purpose. From the memo: However, any allowance claimed for days worked outside New York State must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of- state duties in the service of his employer. Its one of the main points.  Transfer pricing includes discretionary decisions and is part of BEPS.  Its also completely unnecessary:  Pay taxes on revenue in country earned/sold.  Get tax credits/refunds in country were spending is made.  The reason why already profitable companies consider BEPS/tax arbitrage for HQ locations is because they get discretionary power over accounting profit allocation.  Tax policy should serve the society though, and this proposal encourages the spending that benefits society.  Its the usual case that the right answer is different than that being lobbied for. Typically tax treaties will cover double taxation (taxes paid in one jurisdiction are deducted in the other jurisdiction so there is no double tax). You'll need an accountant and attorney with experience in international business setups to confirm and determine which jurisdiction gets first priority of tax payment.  In short, this is the wrong place to get a good answer. Talk to (and pay for) professionals to get you properly set up. You're not physically present in the US, you're not a US citizen, you're not a green card holder, and you don't have a business that is registered in the US - US laws do not apply to you. You're not in any way under the US jurisdiction.  Effectively connected income is income effectively connected to your business in the US. You're not in the US, so there's nothing to effectively connect your income to. Quote from the link: You usually are considered to be engaged in a U.S. trade or business   when you perform personal services in the United States. You ask: If I form an LLC or C corp am I liable for this withholding tax? If you form a legal entity in a US jurisdiction - then that entity becomes subjected to that jurisdiction. If you're physically present in the US - then ECI may become an issue, and you also may become a resident based on the length of your stay. This is how all corporations shift taxes to low income tax . Most large companies are actually hundreds of companies, with individual companies in each country they do business in. They use this type of transfer payment so most of the profits end up in countries with low income taxes. That is why you might as well lower the corporate rate.  It will help employment, and end this kind of useless profit shifting. It's a world wide economy, and companies do what they need to do to keep taxes low no matter what. "Your ""average company and taxpayer"" generally wouldn't have significant off-shore/foreign income. In the U.S., for example, even if you have your employer deposit all of your salary to an account at a foreign bank, they would still report it to the IRS as income. Removing the money from your home country isn't what gets it out of being taxed, it's that the money was never in your home country." "Wait, are you sure you've got that right? What you're describing is a tax credit that counts against your total owed.   In normal operations, companies get to ""write off"" all of their expenses and they only pay taxes on the net profit of the operation. So I guess you could say that if it cost me $100M to move a factory off shore, and my marginal tax rate was 35%, then I would ""save"" $35M in taxes ( it still cost me the $100M, but it only felt like it cost $65M).   This is true of any business expense. I (not Romney, apparently) don't know of any special treatment that offshoring activities get one way or the other." "1) Yes in theory that is right - minus any state taxes as well.       2) They could since there is an unknown amount outside of the US - and probably it will be a percentage and not all. Most of these companies that make a difference are already international companies.       3) They would most likely still do it for any money kept offshore, and it doesn't prevent them from continuing to do it. Again, I didn't say this was a good solution. They are just hoping to ward off economic collapse a little longer by doing this, or perhaps hire more accountants to be able to look at their books to figure out how much they are hiding to punish them. There could be many ""motivations"" for doing this tax. But I doubt any of the motivations intend to stop it from continuing to happen after the tax. The problem is any company that takes advantage of it basically says ""yes, i broke the law - in this amount."" Thus, it might be a good way to get a list of companies to audit more thoroughly." You're right, the issue of inversion is not going to go away as long as there are countries willing to go to 2% on their tax rate.  But the goal isn't really to eliminate them it's to have a tax system and regulatory system which encourages healthy business growth and financial support to the government.  The path the US has chosen is high corporate tax, cherry pick activities they want to encourage through breaks, then rely on taxing overseas profits on money returned to the US (since so many major companies are US based).  This was a great system but its an anachronism since globalization became a real thing.  Now what it has left us with is a tax incentive system where ONLY the business activities with breaks (RD tax credit) are considered worthwhile ventures while profit centers are offshored.  Then no one can reinvest their profits in the US because they can't repatriate cash without paying tax.  The corporate tax structure now hinders employment and investment.  We don't need to lower our taxes to 0 to be competitive.  The most popular countries for offshoring are Puerto Rico (pharma) Ireland and Switzerland their tax rates are effectively 0.  However due to other costs (employment transportation of goods) on a total cost basis the US can be more than competitive with a corp tax rate of 20%. "Your comment to James is telling and can help us lead you in the right direction: My work and lifestyle will be the same either way, as I said.   This is all about how it goes ""on the books.""    [emphasis mine] As an independent consultant myself, when I hear something like ""the work will be the same either way"", I think: ""Here thar be dragons!"".  Let me explain: If you go the independent contractor route, then you better act like one.  The IRS (and the CRA, for Canadians) doesn't take lightly to people claiming to be independent contractors when they operate in fact like employees. Since you're not going to be behaving any different whether you are an employee or a contractor, (and assuming you'll be acting more like an employee, i.e. exclusive, etc.), then the IRS may later make a determination that you are in fact an employee, even if you choose to go ""on the books"" as an independent contractor. If that happens, then you may find yourself retroactively denied many tax benefits you'd have claimed; and owe penalties and interest too.  Furthermore, your employer may be liable for additional withholding taxes, benefits, etc. after such a finding. So for those reasons, you should consider being an employee.  You will avoid the potential headache I outlined above, as well as the additional paperwork etc. of being a contractor. If on the other hand you had said you wanted to maintain some flexibility to moonlight with other clients, build your own product on the side, choose what projects you work on (or don't), maybe hire subcontractors, etc. then I'd have supported the independent contractor idea.  But, just on the basis of the tax characteristics only I'd say forget about it. On the financial side, I can tell you that I wouldn't have become a consultant if not for the ability to make more money in gross terms (i.e. before tax and expenses.)  That is: your top line revenues ought to be higher in order to be able to offset many of the additional expenses you'd incur as an independent.  IMHO, the tax benefits alone  wouldn't make up for the difference. One final thing to look at is Form SS-8 mentioned at the IRS link below.  If you're not sure what status to choose, the IRS can actually help you.  But be prepared to wait... and wait...  :-/ Additional Resources:" Oh I see - then yes I agree with you. Even if it was a foreign company in that situation, they should pay taxes. But in regards to the concept of repatriated profits,  that has to do with profits generated outside of the borders...