Thinking of hiring your cousin in India to help with your U.S. business? Or outsourcing to a relative overseas? You’re not alone-many Indian-American entrepreneurs want to involve trusted family members abroad. But the IRS sees this differently.
At Kewal Krishan & Co, we regularly assist U.S. businesses owned by Indian nationals in setting up IRS-compliant contractor or payroll relationships with relatives and employees abroad-without triggering unnecessary tax traps.
Let’s break down what you must do in 2025 if you’re hiring family abroad, including U.S. payroll rules, Form 1099 vs. Form W-2, and international contractor compliance.
Why U.S. Owners Get It Wrong
Most small business owners don’t realize that:
- Paying family abroad doesn’t eliminate IRS reporting.
- Hiring relatives can be viewed as related-party transactions under IRC §482, and might be scrutinized.
- Wire transfers or PayPal payments can still be considered taxable compensation.
Not reporting foreign compensation can trigger IRS penalties, foreign asset disclosures (FBAR/Form 8938), and audits.
U.S. Payroll vs. Foreign Independent Contractor
Scenario A: You hire a relative abroad for marketing/design work.
- No W-2 is required.
- 1099-NEC is not required for foreign contractors (if work is performed outside the U.S.)
- But you must maintain a W-8BEN or W-8BEN-E from the payee to prove foreign status.
Scenario B: You hire a U.S. citizen abroad or bring them to the U.S.
- May need to issue W-2 and withhold Social Security, Medicare, and federal income tax.
- IRC §3121(l) may apply for U.S. employees working abroad under your control.
Scenario C: You hire your spouse, sibling, or parent abroad under a contract.
- The IRS may recharacterize the compensation as a distribution/dividend unless there’s a real business purpose and fair market value involved.
- Must ensure reasonable compensation, clear deliverables, and documentation.
Forms You Must Know
| Form | Purpose |
|---|---|
| Form W-8BEN | Declaration by foreign individual contractor |
| Form 1042 & 1042-S | If withholding is required for payments to foreign persons |
| Form 1099-NEC | For U.S.-based contractors (not required for foreign ones) |
| Form W-2 | If you hire your family as a U.S. employee |
| Form 8938 & FBAR | If your entity is paying from foreign accounts or has foreign contractors with financial relationships |
| Form SS-8 | For determining worker classification (employee vs contractor) |
Step-by-Step: Hiring a Relative Abroad (the Right Way)
- Determine Relationship & Role
Is this a genuine service relationship, or just a payment? Avoid informal arrangements. - Classify Correctly
- If the person is in India and doing work from there → likely a foreign contractor.
- If they relocate to U.S. or are under your control → W-2 employee.
- Obtain Documentation
- Signed independent contractor agreement (with scope, fee, timeline)
- Collect W-8BEN if foreign individual, W-8BEN-E if company
- Keep invoices, email trails, deliverables for audit defense
- Review Withholding Rules
- For most Indian contractors, no U.S. tax withholding applies due to U.S.-India treaty benefits.
- Still must track payments for proper tax compliance
- Don’t Forget Transfer Pricing
- If this is your own Pvt Ltd paying a U.S. company or vice versa, IRC §482 requires arm’s length pricing
- May need a formal transfer pricing report
Real Example
Rajiv, a U.S. resident, hires his brother in Delhi to manage social media for his Wyoming LLC. He pays $1,200/month via Wise. His CPA fails to collect W-8BEN or document the arrangement.
Result: During IRS audit, Rajiv is asked to explain $14,400 in foreign payments. Since he lacked documentation, it’s treated as a non-deductible personal distribution.
We helped Rajiv retroactively build proper documentation, file W-8BEN, and issue contracts to protect deductions and avoid penalties.
Conclusion
Hiring family abroad can absolutely be tax-efficient and beneficial-if you follow IRS rules. Proper documentation, classification, and awareness of treaty benefits are key.
If you’re running a business in the U.S. and hiring or paying relatives abroad, don’t make the mistake of ignoring IRS scrutiny.
Call to Action
Anshul Goyal, CPA EA FCA, is a licensed U.S. tax professional, Enrolled Agent before the IRS, and cross-border expert specializing in U.S.-India tax compliance. He helps businesses document foreign contracts, avoid related-party missteps, and stay fully IRS-compliant.
About Our CPA
Anshul Goyal is a Certified Public Accountant in the U.S., Enrolled Agent before the IRS, and Fellow Chartered Accountant (India), serving Indian-American entrepreneurs with IRS-compliant cross-border tax and payroll solutions.
Disclaimer
This blog is for general informational purposes only and does not constitute legal or tax advice. Please consult a qualified U.S. CPA to evaluate your specific circumstances before taking action.
Top 5 FAQs
1. Do I need to issue a 1099-NEC for my brother in India?
No, U.S. tax law doesn’t require 1099s for foreign contractors doing work outside the U.S.
2. Is W-8BEN mandatory?
Yes. It proves that the contractor is a foreign person and helps avoid incorrect U.S. tax withholding.
3. Can I deduct payments to family abroad as a business expense?
Yes, if the payments are for legitimate work at fair market value and properly documented.
4. What if the IRS disallows the deduction?
Without documentation, the IRS can recharacterize the payments as dividends or gifts-non-deductible.
5. Are there any limits on paying foreign family?
There are no caps, but excessive payments or vague roles may attract IRS scrutiny.