Internal Revenue Service (IRS) rules for taxing foreign contractors earning U.S. dollars on U.S. ground have far-reaching implications for both IT contractors and the enterprises seeking to retain them. Both parties must act in accordance with IRS requirements to ensure uninterrupted access to critical talent.

Who's Affected and How?

IT contractors and consultants are frequently hired from Canada and the U.K. to work on projects for U.S. enterprises. These free agents usually do so personally, working under their own names. While this is a mutually beneficial relationship for both enterprises and free agents, the IRS imposes strict rules for employing foreign contractors. Failure to comply with these rules – including a failure to properly distinguish between contract workers and permanent employees – can result in stiff penalties for the enterprise as well as loss of talent.

According to the IRS, a foreign contractor is subject to U.S. tax on his or her...