Nov

2009

How To Handle Tax When Outsourcing Overseas?

Firstly a big thank you to everyone who participated in the Mass Outsource launch last week. It was a huge success and I’ve already begun teaching all the students who have joined the program. If you haven’t grabbed your free copy of Secrets Of Outsourcing Experts Revealed report yet, I recommend you do so because there’s a lot of cool resources inside.

Since the launch and the feedback I’ve been getting from the videos, a recurring question that has come up from Mass Outsource Mastermind is this:

“How do I handle tax when I outsource my work overseas (to the Philippines)?”

It’s a really good question and I can only share this from my experience. Before you read any further though, I need to let you know that I’m not a legal adviser or financial consultant in this area. Therefore I HIGHLY RECOMMEND you seek advise from experts who handle this sort of detail as everyone’s financial situation is different to mine. What I share with you below is what happens in my own business and this is a general overview of how to go about this.

How To Handle Tax When Outsourcing Overseas?

In my own business I currently hire a few full time staff from the Philippines and they are paid monthly via Xoom or Paypal. Let’s take a step back and look at an example if you were hiring staff from your own country. Since I am living in Australia, normally to employ staff there would be a lot of paper work involved, from filling out a Tax File Number form, Group certificates to Superannuation forms. It becomes a real nightmare when you start to hire 15+ staff! I’ve been there and it’s not pleasant to see so much paperwork just to manage employees, let alone managing the business. In that circumstance, I would recommend hiring a book keeper to help you pay your staff, manage the forms, and all the account keeping records.

Now in Australia, every quarter I would have to pay the PAYG (Pay As You Go) tax to the government which is a percentage of income tax taken out of your employees wage and your own wage that is compulsory. The highest tax bracket here is around 48.5% and the minimum tax is around 15%. So somewhere in between there is that percentage of tax taken out from our wages. On top of this, a minimum of 9% is taken out of the total wages and paid to Superannuation (similar to a 401K), which is also compulsory.

In comparison, jumping back to paying virtual full time or part time staff overseas, there is none of these details I need to worry about in my own business. Basically all I have to worry about is paying their monthly wages on time and they sort out the rest.

How Is This Accounted For In My Business?

The next question that comes up is how do I account for these funds that go out of the business? Well, I don’t account for these transactions under as wages, because if you do it is then subject to the PAYG (Pay As You Go) tax, and superannuation. I treat them as an expense, since I am hiring them as contractors. Therefore in my Profit and Loss statement I’ll see an account listed there as “contractors” with a total expense of how much it costs for me to hire full time virtual staff. This is the simplistic version so that you can see how this works. Obviously there are other finer details which I leave up to my accountant to work out.

One last thing to mention, I only pay income tax at the end of a financial year on the net profit of the business and throughout the year I don’t have to worry about this. Whereas if I had employees in Australia I would have to pay tax every quarter on behalf of them.

In my opinion this is one of the many benefits of hiring full time staff from overseas.

Additional Resources:

Tyrone Shum
Benefiting From Outsourcers

Categories Outsourcing
Tags: Book Keeper, Circumstance, Cool Resources, Emp, Financial Consultant, Financial Situation, Full Time, Good Question, Group Certificates, Income Tax, Launch, Legal Adviser, Living In Australia, Mastermind, Outsource, Outsourcing Experts, Own Business, Paperwork, Philippines, Quot, Real Nightmare, Secrets Revealed, Time Staff, Xoom

Comments

24 Comments on "How To Handle Tax When Outsourcing Overseas?"

uberVU - social comments on Tue, 24th Nov 2009 4:44 pm

Social comments and analytics for this post…

This post was mentioned on Twitter by tyroneshum: How To Handle Tax When Outsourcing Overseas? http://bit.ly/52fDuo...

Dwight Anthony on Wed, 25th Nov 2009 12:07 am

Ah, finally some perspective. I was wondering the same of how to handle virtual staff and the tax aspect. Makes perfect sense that you treat payment to outsourced staff as a business expense as they are not directly working for your business but instead, 3rd party subcontractors. This makes sense.

Other question I have for you Tyrone, are you using Thesis as your main theme on this blog? I really like it.

Tyrone on Wed, 25th Nov 2009 7:21 am

Hi Anthony,

Thanks for your comment. Answering your question, no I’m not. This is a customized theme my graphic designer did for me a while back.

ATV Auction on Wed, 25th Nov 2009 7:35 am

Yes it is definitely easier to manage taxes when your employees are not in the same country as you. It almost makes me want to completely avoid hiring anyone local.

Gordon Rowland on Wed, 25th Nov 2009 11:28 am

What a relief to learn that tax issues are so much easier when outsourcing contractors overseas! (Especially for impractical, arty types like me, with an aversion to numbers, percentages, deductions, taxation and accountancy procedures.

Another benefit, as well as lower costs, of outsourcing to the Philippines!

Thanks Tyrone

Thomas on Wed, 25th Nov 2009 5:31 pm

I want to thank you for all of the GREAT content that you have shared with all of us.
The tax issue is one that we all must be careful as companies go offshore to do business (from the USA). Be careful how you label these people that you hire offshore.
I can’t wait to get that first services off shore as I have been struggling with getting things done. Too much to do and not enough of me to go around.
Thanks for your great insight.

Real Glass cookware on Thu, 26th Nov 2009 12:55 am

This portion being a withholding tax that needs to be submitted to the Australian Taxation Office. He should telephone the taxation department. They are very helpful and will give him the information he needs.

Tyrone on Thu, 26th Nov 2009 9:25 am

Hi Thomas,

Thanks for your comment. I wanted to share with everyone about the tax issue and give them an overview so that it clears up some of the concerns.

Tyrone on Thu, 26th Nov 2009 9:26 am

Hi Gordon,

You’re welcome. That’s mostly the reason why I considered outsourcing first before hiring full time staff when I started my online business. I’ve run retail stores before and when it comes to handling paperwork and payroll, I find it a real nightmare.. not that I did any of it, just the thought of it gave me the creeps.

Tyrone on Thu, 26th Nov 2009 9:27 am

Hi Jeremy,

It’s becoming common place for people to hire people offshore compared to local because of the cost savings and less paperwork involved.

bridge design on Sat, 28th Nov 2009 5:03 pm

There are re-education programs out there that are government funded (usually state, county, or city, not federal.) If you qualify, and they have the budget, they will pay for some retraining to get you back into the workforce.

bridge design on Sat, 28th Nov 2009 5:04 pm

Check with your local government and you unemployment office. A lot of the time these programs run out of funding about halfway through the year, but if you are one of the lucky ones, you may be able to take some courses.

infoproservice on Thu, 3rd Dec 2009 8:47 pm

Nice! I really enjoy and respect your thought and idea! Thanks for sharing this Idea! Have a great Time Bye.

Online Muzik Dinle on Tue, 8th Dec 2009 10:24 pm

Too much to do and not enough of me to go around.
Thanks for your great insight.

used bulldozers on Fri, 11th Dec 2009 7:05 pm

I think that the most unfair thing that could be done would be paying taxes in two countries. E.g. if you hire people from abroad you pay taxes in their country and in yours. That is of course very handy for the governments of those countries but totally not good for those who pay taxes.

Tyrone on Mon, 14th Dec 2009 9:47 am

Yes, it would be unfair to pay taxes in both countries. This is why you only need to work out tax for yourself and your virtual staff will do the rest themselves.

Briefcases on Tue, 15th Dec 2009 9:10 am

This is an interesting problem that I’m sure a lot of people run into. Most business owners are so used to paying tax for their local employees. When you hire overseas employees, things become a lot easier. Plus those people often are willing to work for much lower rates.

commercial cleaning on Wed, 16th Dec 2009 8:31 am