[dennisgorelik]

The contract with foreign contractors is NOT "1099".

AFAIK you do not have to file 1099 form in order to deduct foreign contractor expense from US business revenue.

I'm not a lawyer or CPA, but I run my own business and pay to foreign contractors.

[tptacek]

You're right; it's 1042-S.

[dennisgorelik]

Is filing 1042-S mandatory?

It may or may not be the case, but when foreign contractor works as a business entity then "Foreign Person’s U.S. Source Income" seems to be irrelevant.

[tptacek]

Work with a US nexus is subject to withholding. More broadly, this article does a good job of summing up my concerns:

http://www.whitecase.com/hrhottopic-0711/

[dennisgorelik]

Thanks - that's an interesting point of view.

If I were running a company with hundreds of employees&contractors that would be a point of concern.

However from a bootstrapped startup perspective that probably does not even worth investigating further.

Everyone is free to sue for anything. That's the cost of doing business.

Hiring foreigners directly as employees has many other risks in addition to having inevitable overhead.

[tptacek]

This is an example of what I think is a common and very damaging metafallacy in startup entrepreneurship: the basic business safeguards we don't pay attention to because they don't seem to matter until our companies get big.

But these are some of the worst problems, because they submarine. You pour the money, sweat, and (most importantly) time into an enterprise, risking its total failure. You stick with it, your company gets its footing, you're poised to see a return. Then bam, disaster: some stupid thing you weren't careful about when you were 4 people explodes, counterfeiting your success.

You'd have been better off it exploded when you were just 4 people big. You'd have known you were screwed, and could have saved yourself the time and energy, and used the opportunity to move on to something that had a chance of succeeding. Instead: you lose 90-100% of your outcome to a lawsuit.

[dennisgorelik]

I don't get it.

There is no reason to sue struggling startup, because if you sue for too much then the startup would simply fold.

That's the main way startup protects itself.

Struggling startup usually does not have funds to lawyer up.

BigCo on the other hand is a very attractive target, but has funds to lawyer up.

If struggling startup successfully transitioned to BigCo then potential exposure from past shortcuts is small (relative to BigCo revenue).

How could "contractor vs employee" shortcuts applied in 4 people startup be a significant problem for BigCo (which already transitioned into lawyered up way of doing business)?