How should a small US Corp hire and pay workers in the Philippines?

We are a small US Corp that hired a couple of workers in the Philippines to help us with some of our online work.

We are paying them directly, but that means they do not have Social Security or Health benefits and we would like to help them obtain those.

We tried to sign up but ran into a ton of legal red tape. i.e.. Basically we are to set up a Foreign branch Office, which is a God Awful process, starting with the Philippines Embassy.

I was told that if we do that, the IRS will expect us to pay taxes on their salaries, which we do not mind paying the Philippine taxes, but we do not want to pay taxes in both the Philippines and the US.

Is this True? Will the IRS tax us for their salaries if we pay them direct, even if we pay the Philippine taxes?

If they're your employees, then you have to withhold their taxes and SS, and pay your own payroll taxes on their account.

I have no idea about how it works in the Philippines, but if possible I would suggest hiring them as contractors, and leaving the tax issue to be dealt by them directly. In this case they need to file for ITIN, and you withhold certain amount from the payments which they then claim directly from the IRS on their own. That would be significantly simpler for you (maybe not for them though).

This 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. This is not a legal or tax advice, and you should consult a tax professional/legal counsel for a definitive opinion.

I am not a lawyer, but I cannot see any reason why you would pay twice. If you set up a duly registered company in the Philippines, even if it is a company branch, that company will pay taxes in the Philippines for all income generated in the Philippines. And its workers are subject to the Philippines law, not the US one.

The US taxman can chase you on profits submitted to the head office in the US, I presume, but that's all. Because the US and the Philippines must be in a double-taxation agreement, you should not be this kind of trouble. And you are not looking for income in the Philippines anyway, you are just hiring local people.

On a different note, just my 2 cents as a foreigner with a Philippines office, and having gone through some of your issues, I'll tell you that opening a branch in the Philippines is a nightmare. If you are lucky to get a good lawyer on this side, fair enough. I tried to do it myself in the past, and costed my good money and time before I gave up. No matter how many papers I passed through the Phils Embassy, the SEC would always claim that it was not what they needed and would ask for something else. Lawyers, public notaries, etc. It takes forever and I ended giving up.

Options I would suggest:

1. Register a local company. There are a few law firms, some of them American that can assist you with this. Not very cheap really, but it is way easier than registering a branch. Your US firm can own 100% of that local company.
2. Ask your employees to set themselves as contractors (I cannot remember the exact Filipino term for it) and pay their taxes.
3. There a few firms that can hire your guys for you for a monthly fee. The amounts vary, but, if you are not planning to expand much, and you only need 2 or 3 guys, this might be the simplest way to do it. They'll handle your payroll, government contributions and HMO charges for you.

Filipino companies require way too much paperwork, and, unless you plan to expand in the future, it is a lot of hassle in terms of payroll, accountants, etc. I would go for option 2 or 3 at this stage, really.

Hope that this helps.

IANAL, but generally, a foreign person is subject to U.S. tax on its U.S. source income at a rate of 30%, otherwise known as Non-Resident Alien (NRA) Withholding. See sections 1441, 1442, and 1443 of the Internal Revenue Code.

Irrespective of the "extra mile" you are trying to address in this question, which is noble, and given that you are already paying them, you should already be involved in taxes and withholding. If you are not, the IRS will nail you in an audit. So, you should immediately consult a well-versed tax attorney and right up your tax situation past and present.

It is possible that, in the Philippines, they can claim credit for taxes paid to the US. That should be left to them to work out in their jurisdiction.

Simpler and cheaper is to form Philippine company and have the contract with Philippine company. Philippine company will hire workers and pay local taxes.

Your workers may form that company or hire someone locally to do that for them for reasonable fee. Establishing Philippine company from US is much more expensive.

Do not pay taxes twice when you should not.

The contractors you have in the Philippines will pay their own taxes as self-employed. the income you paid them is not treated as US income, so it's not taxable in the US. You will consider the money you send to them as "business expense" when you file for IRS.

U pay us tax, let them pay their own taxes out of their own pockets as self-employed,so that they register and obtain their own tax identification number from bureau of internal revenue - philippines) and become a legitimate taxpayer. you need not to worry about that so long as you withhold part of their income and submit to irs for taxation. Secondly, if you hire an attorney-in-fact or for that matter a lawyer to do the job for you im the philippines, you pay him a one time fee so that he will hire employees through an employment agency and the agency will yake care of it . Done.