As a US-based online business, I have several employees living in the Philippines (citizens of Philippines). Are the wages I pay them considered to them to be US source income? ========> It depends; unless they are/were physically present in US or works done by them in US( I mean if the services were performed in the U.S), their wages are NOT US source income. Income is generally considered ?U.S. source? if the location of the activity for which the payment is being made is in the U.S. This is the rule for compensation paid for services performed in the US. All income that is U.S. source income is taxable in the US. Income that is not U.S. source income is not taxable.
Am I required to withhold tax at 30% for them?=======>As said it also depends; unless they re US source income, you do not need to w/h tax at 30%;however, many US payers usually want W8BEN from their nonresident payees; in general, foreign persons are subject to U.S. tax at a 30% rate ONLY on their US source income they receive from U.S. sources.NOTE; The U.S. imposes a 30% withholding tax on certain non-business income paid to a non-resident from U.S. sources. Generally, the U.S. payor of such income must withhold the tax. The 30% withholding tax does not apply if the non-resident has income effectively connected with a U.S. trade or business. Income is taxed in the same manner as a U.S. person. A non-resident will be considered to be in a U.S. trade or business if he or she conducts relatively continuous business activities from a fixed location in the U.S.
Am I required to file Form 1042 and Form 1042-S, and are they required to file any forms (such as W-4 or Form 8233)?====>As said above, it depends; you do not need to issues anyW4 to your EEs overseas uNLESS they are physically present in US. Foreign workers and students who are considered non-resident aliens and are working in the US are subject to tax withholding. IRS Form 1042-S is an annual information return for any monetary amounts given to a non-resident alien by a US based institution or business. So you do not need to file form 1042S with the IRS. So unless you w/h tax at 30% on your EE?s income, you do not need to file form 1042; since form 1042 is a form that one files with the IRS to report withholding of taxes from the U.S. income earned by a foreign person.
From what I can tell, the reporting is very simple if the workers are classified as foreign contractors, but much more complicated if they are considered employees.
-They perform all work in the Philippines, and have never come to the US.
-They are being paid less than $10,000 USD annually (the tax treaty between US and PH states that income derived from services in the other country is only taxable if it is above $10,000).
-They perform customer service for my clients. My clients are from across the world, but the majority of them are in the US========>as mentioned previously; it all depends; in your case yu do not need W8BENs form them and you do not need to w/t tax at 30% on their wages that you pay since they are NOT physically present in US and they donot work in US for you. Please contact an IRS Enrolled Agent or a CPA doing taxes in your local area fromore professional help.