Thread: Taxes in the US for freelancers or contractor

  1. #1
    Registered User C_ntua's Avatar
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    Jun 2008

    Taxes in the US for freelancers or contractor

    I would some some information for how the tax system works in the US for a freelance programmer. You agree with a company to make a project for X amount of money. What are you required to do after that tax-wise?
    If you are a freelance programmer and you are interacting with a company from a foreign country?
    If you are a freelance programmer from a foreign country interacting with a US company?

    A brief explanation would be helpful to understand the taxpayer system here in the US

  2. #2
    (?<!re)tired Mario F.'s Avatar
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    May 2006
    Quote Originally Posted by C_ntua View Post
    If you are a freelance programmer from a foreign country interacting with a US company?
    It's a bit evolving. But not overly complicated.

    1. First the easy part:
    Depends on the country naturally. But for most countries VAT (the equivalent of the sales tax in USA) will apply. So if I perform a service to a client in USA I will also charge them with my country's (Portugal) VAT for that service. I will then have to give that money to my government on my next VAT declaration.

    2. Now, if you are performing a service for me:
    If I'm a taxable person liable for VAT and you perform a service for me, I may have to pay the tax to my government if you are an entity without a head office, permanent establishment or domicile on Portuguese territory, and have not appointed a tax representative in Portugal. As far as you are concerned, this is not a concern of yours. You shouldn't care about it. You just charge me your work as you are expected according to the laws and regulation in your country (someone here will tell you about USA laws. I don't know what they are). This is the same for any country that uses VAT.

    3. Double Taxation Relief:
    If your country of origin forces you to charge me for a VAT (or Sales Tax) and I'm that person to who you performed the service that is liable for VAT, I will be paying two taxes. Yours and later my own. Under some circumstances, I may request a relief. Usually I will request a Foreign Tax Credit Relief (essentially my VAT balance is credited with a portion of your tax).

    4. Clarification:
    How am I liable to VAT when on the receiving end of a service performed by you on the USA? I'm not entirely sure. The rules are complex and my accountant once tried to explain it to me and I got bored. Not all types of services are liable. But essentially if you perform me a service that is similar to my line of business, I'm liable for VAT. That is, if I'm a programmer and you do programming for me, I'm liable for VAT.

    5. Conclusion
    If I'm providing you a service and I live in a country with VAT, I will almost certainly charge you my country's VAT on top of the service cost. If you are providing me a service and I live in a country with VAT, you don't care. You just charge me what your country tells you to. Except if you have an head office, permanent establishment or domicile on that country. On that case you will have to charge me VAT and then pay that VAT.

    6. Advise
    USA laws shouldn't differ much from Portuguese laws (which are in fact mostly EU laws, and affect most EU countries equally and other countries with VAT with the notable exception of UK which does have a few differences). However this is taxation we are talking here. Don't take my word for it or anyone's. Just use our comments as a guideline. You will always want professional advise on your country before performing any sort of service or transaction with another country.
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  3. #3
    Registered User C_ntua's Avatar
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    Jun 2008
    Thank you very much for the information.

    Personally, I am in Texas (no state taxes).
    So if I get this straight, if I am paid by somebody 100$, I will have to give back a sales tax (VAT) to the state.
    I guess I will also pay my federal taxes (income tax) and social security and medicare as a self-employed worker.
    For all the above I would need to feel appropriate papers when the tax period comes.
    Am I getting all of these right?

    Another questions is this:
    I will be associating with a Greek Company targeting US companies. My associate asked me about the requirements the payment needs. Can the company just sent money to a bank account, to paypal or anywhere else, or will they require the Greek company to fill any forms or make an invoice?

  4. #4
    Lurking whiteflags's Avatar
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    Apr 2006
    United States
    I hate to just dump a resource, but you may want to read what the IRS has to say on the subject.

    Self-Employed Individuals Tax Center
    Who Is Considered Self-Employed?
    Self-Employment Tax
    Estimated Taxes

    You may not even be considered self-employed.

    Also, the US does not have a VAT, the sales tax is mostly a flat rate tax and is levied whenever you buy something. It is not levied by all states, either. It is not an income tax concern. The state of Texas will tax your income separately, depending on your status, with more forms.

    Echo the need for a tax professional. Then, next year, save money and use turbo tax!
    Last edited by whiteflags; 06-25-2010 at 12:24 PM.

  5. #5
    Registered User C_ntua's Avatar
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    Jun 2008
    Thanks, I ll get to study

  6. #6
    Super Moderator VirtualAce's Avatar
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    Aug 2001
    VAT has not been adopted in the US as of yet. It is being looked at but none of the states have adopted it so that Portuguese tax law differs greatly from what is in the US. Your best bet would be to contact an accountant near the area where you are going to be contracting. They will know all the ins and outs of our uber confusing tax code that needs to be ripped out by the roots. You will need information on the state tax law where you will be contracting as well as the federal tax law.

  7. #7
    Make Fortran great again Epy's Avatar
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    Sep 2009
    California, USA
    Make estimated tax payments every 3 months, the IRS website will give you the self-employment tax %. It's not as easy as that though, remember the guy who drove his plane into the IRS building in Texas? The section of tax law he mentioned in his suicide note basically says that technical (engineering, drafting, programming) freelancers either have to do work for more than one company, or be part of a company, which you can't do as one person in one of those technical positions.

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