Hire Indian contractors from the US — compliance playbook

Many US companies engage Indian software engineers, designers, accountants and consultants as independent contractors. The arrangement avoids the cost of an EOR or subsidiary, and for genuinely independent professionals it's clean. Where it goes wrong is when the contractor is, in substance, a full-time employee — at which point both the IRS and the Indian tax authority can recharacterise the relationship, with expensive consequences.

The classification test — is this person actually a contractor?

Both the US and India apply a substance-over-form test. The key factors:

• Does the worker set their own hours and methods, or do you direct them as you would an employee?
• Do they have multiple clients, or are you their only / dominant source of income?
• Do they use their own equipment, software, workspace?
• Are they paid for project deliverables, or for time worked?
• Do they have entrepreneurial risk — investment, profit, loss?
• How long is the engagement? Open-ended full-time work for 12+ months looks like employment, not contracting.

If the answers tilt toward 'employment', the relationship is misclassified. The US risk: IRS recharacterisation, back federal employment taxes plus penalties. The India risk: PF, gratuity and other employment-statute claims by the contractor, plus the foreign company being treated as having a PE via agency or service PE.

What the contractor agreement must contain

1. Scope of services — defined deliverables, milestones, acceptance criteria. Not 'general engineering services'.
2. Fee structure — fixed-price by milestone or hourly with monthly invoicing. Avoid monthly retainers that look like salary.
3. Term and termination — open-ended with 30-day termination, NOT indefinite.
4. IP assignment — work-for-hire under US law plus a separate assignment of Indian IP rights (Indian copyright law has a different default).
5. Confidentiality and non-disclosure with reasonable post-termination duration.
6. Independent-contractor language — explicit acknowledgement that no employment relationship exists, contractor is responsible for their own taxes.
7. Governing law — typically Delaware or New York, with arbitration. India is a New York Convention signatory so US awards are enforceable.
8. GST representation — contractor warrants whether they are GST-registered and will provide compliant invoices.

How to actually pay them

Two clean options for paying Indian contractors from the US:

• Direct wire transfer to their Indian bank account in USD. Their bank converts to INR. The contractor receives a FIRC (Foreign Inward Remittance Certificate) from their bank that documents the foreign-source income.
• International payment platforms — Wise (TransferWise), Payoneer, Stripe Atlas international payments. Lower fees, faster, but FIRC may not be issued automatically.

The contractor's bank issues a FIRC for each foreign remittance, which they use to claim export-of-service treatment under GST (zero-rated, with input credit refund). Most professional Indian contractors expect and rely on this.

US tax position

From the US side, paying an Indian contractor is generally not subject to US backup withholding. The contractor is a non-US person providing services performed outside the US — no US-source income, no Form 1099, no W-2.

• Have the contractor sign Form W-8BEN (individual) or W-8BEN-E (entity) confirming foreign-person status. Renew every 3 years.
• Document the services-performed-outside-US position in your file in case of IRS audit.
• Report the payment as a foreign contractor expense on your US return.

India-side compliance — what the contractor handles

The Indian contractor is responsible for:

• GST registration if aggregate annual income exceeds ₹20 lakhs (₹10 lakhs in some states). Below threshold, no GST registration needed; export of services is zero-rated regardless.
• Income tax — services to foreign clients are export of services under GST and ordinary professional income under IT Act. Filed in ITR-3 or ITR-4 (presumptive).
• Advance tax payments quarterly if total tax liability > ₹10,000/year.
• Maintaining FIRCs as proof of foreign-source income.

Why there's no Indian TDS on these payments

Section 194J (and from FY 2026-27, Section 393) applies to TDS by resident payers on resident recipients. A US company has no Indian source from which to withhold and no obligation to deduct Indian TDS on payments from the US to Indian residents. The contractor pays their own Indian income tax.

This is a key difference from hiring through an Indian subsidiary: when the subsidiary pays the contractor, TDS at 10% under 194J applies. When the US parent pays directly, no Indian TDS.