Disclaimer: I am not a Certified Public Accountant (CPA), nor am I a tax attorney. You should seek professional advice about your accounting and tax concerns. While this blog post is directed mainly to employers based in the US, other than the specifics of which tax documents to use, the tax situation is much the same in most other countries. I do encourage you to consult an accountant or tax attorney familiar with your local taxes.
The Tax Problem
Most employers agree: payroll taxes are like blood-sucking leeches. They drain monetary reserve and force employers to offer lower wages. But payroll taxes are just the tip of the iceberg for small business owners hiring domestically. Consider the hassles of quarterly filings, W-2s, and other migraines involving the IRS…
And How to Solve It!
Enter: Philippines outsourcing.
When you employ Filipino VAs, taxes are simple. Because Filipino VAs are foreign contract workers rather than US employees, you don’t have to worry about 1099s, W-2s, benefits, unemployment, disability or other IRS pains. In fact, you have no obligation to report your VA’s wages to the IRS. And your VA is solely responsible for taxes due to the Filipino government.
IRS migraine resolved!
Tax Forms That Actually Make Life More Simple
We do recommend that you request a current W-8BEN form from each of your VAs. A W-8BEN basically states that they are foreign individuals receiving American payment for services. These should be filed in your personal records in case of an audit – to account for their payments as ‘business expenses.’ You can find the document here:W-8BEN
In tandem with the W-BEN form, some advisors recommend keeping on file a signed statement from each VA stating that they are working on foreign soil, and no services are being performed in the US. Again, this is just for your personal records and is only needed in case of an audit. There is no official form for this statement. Just ask your VA to type it out, date it, sign it, and send it to you.
S corporations and LLCs will need to file an 1120S detailing business expenses. Here is a copy of what the form looks like and how you’ll include your Filipino VAs wages.
This is page 1 of the 1120S, or the tax form used for S corporations. Notice that payments to Filipino VAs are deductible business expenses reported on line 19 as “Other deductions.”
The “Attached Statement.”
The requested “attached statement” has no standard form. Simply type up a document stating which line you are referencing (Page 1, Line 19), the expenses you are claiming, and how much each expense was.
Here is an example of how our accountants have done this for us:
Notice that the top of the page specifies that this is explaining the details of 1120S Page 1, Line 19. Under this, we’ve listed various expenses that were lumped together under line 19, including “Subcontractors,” or our Filipino VAs.
And That’s It!
That’s all you have to do! Simplified taxes are just another reason why Philippines outsourcing can be a magic bullet for business owners. Boom.
Since you’re not required to pay taxes on your VAs, consider compensating them more generously. Remember that their government doesn’t provide social security, medical benefits, or disability coverage. When you live in the US and can’t afford food, you can apply for food stamps. When you live in the Philippines and can’t afford food, you go hungry. The Philippines is still a developing. Please take care of your employees.