Outsourcing: Do you need to pay local taxes for your virtual staff?

If you hire virtual staff in the Philippines, you might have wondered how your employees deal with taxes.

The following question came in from a reader in Budapest, Hungary. I think a lot of people are asking questions like this, so I wanted to share the question and my reply.

Here’s the question:

Do you have Filippino workers? Is it fine not paying their social security and other taxes?

Because in a few countries both employers and employees pay the social security tax.

So if let’s say I have a worker in the Philippines, and I pay her $350 per month, then I don’t have to pay any taxes to the Philippine BIR (tax office)? So only my worker must pay income tax and other taxes to the Philippine BIR?

Here’s my answer: Yes, I have virtual staff in the Philippines. I have both full-time staff who work for me and are paid directly by me. I use PayPal to pay them at the end of every month. I also have a couple of occasional freelance workers that I use for graphics, web coding, and audio editing. I pay them using PayPal when projects are completed. Finally, I have a few people that I hire on oDesk for project work and they are paid directly through oDesk.

I do not pay anything beyond their normal pay (and any bonuses I give them). From my perspective, they are all self employed people. They run their own business. It is their responsibility to handle their own tax situation.

I am not a legal expert on foreign taxes by any means. But I feel no obligation to pay another country’s government any tax.

Let me put it to you another way: When an Australian hires a US freelancer, is he obligated to pay the IRS? Of course not. If a Canadian hires a Brit to do graphics work, does he cut a check to the central government? No way.

When you hire virtual staff, you are treating them like employees. But legally they are self employed people. They are contractors. Or they may have a corporation. Let them sort out their own taxes. Outsourcing is about reducing complexity for your life and your business.

I welcome thoughts and opinions, even if they differ drastically.

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