25% Threat to Offshore Contractor Invoices 

By all accounts, U.S. finance leaders just got a new line item to model: a proposed HIRE Act would slap a 25% tax on payments to foreign workers for services “used” in the United States, a direct hit to offshore contractor invoices and cross‑border SOWs. 

That’s a stark contrast with today’s law, where foreign‑performed services are generally not subject to Chapter 3’s default 30% withholding on payments to foreign persons. 

Why does this matter now? Current U.S. sourcing rules tie service income to the place where performed, not where the output is used. Shifting to a “used in the U.S.” test would be a fundamental break from long‑standing practice, reshaping cost models, vendor documentation, and who bears withholding risk across global services supply chains. And to avoid confusion: this is a new proposal—not the 2010 HIRE Act that dealt with payroll incentives. 

In this piece, we’ll unpack what a use‑based levy could mean for day‑to‑day operations: pricing, gross‑ups, payment timing, and how contracts might need to change. We’ll also outline how payers could prepare documentation, reporting, and systems to handle withholding if the proposal advances. 

If you rely on offshore talent for development, design, support, or back‑office work, understanding how to manage the potential 25% hit—before it’s on your payables queue—will be essential. 

The HIRE Act’s 25% Levy: What’s Proposed and How It Breaks with Current Rules 

A draft HIRE Act would impose a 25% tax on payments to foreign workers for services “used” in the United States—shifting tax liability onto cross‑border services consumed by U.S. businesses. 

Today’s baseline is different: under the Internal Revenue Code, compensation for services is sourced by where the work occurs—income is performed in the United States if done in the U.S., and performed without the United States if done entirely abroad. A use‑based levy would therefore reach invoices even when every hour of work is performed outside the U.S., a fundamental departure from the place‑of‑performance standard. 

Withholding rules mirror that sourcing logic. The regulations make clear that “amounts subject to withholding” are generally U.S.-source FDAP income paid to foreign persons; foreign‑source services typically sit outside that bucket. A new “used in the U.S.” levy would effectively bypass the performance test, creating a separate charge on gross service payments tied to where the benefit is consumed—not where the labor happened. 

Critical mechanics—who must withhold and remit, how “used in the U.S.” is defined, carve‑outs, and effective dates—will turn on statutory drafting and final definitions in the bill text. Payers should watch for explicit coordination with existing sections 861/862 and 1441/1442, anti‑avoidance rules, and any treaty override language. 

If enacted as described, the proposal would layer a new, use‑based tax cost onto offshore invoices and force U.S. buyers to re‑map service categories, documentation, and withholding workflows to remain compliant. 

Key Takeaways: 

Which Payments and Contractor Arrangements Are at Risk 

If a use-based levy lands, the immediate operational tell will be reporting: the IRS requires Form 1042‑S to be prepared and furnished by March 15, typically for each foreign recipient paid amounts subject to withholding. That calendar alone hints at where risk concentrates—where U.S. buyers touch foreign payees and platforms on cross‑border services. 

Under today’s rules, income from services turns on the place they’re performed; it’s sourced where performed, so work done entirely offshore is generally foreign‑source and outside Chapter 3 withholding. That’s why classic offshore invoices (dev, design, BPO, support) have not triggered U.S. withholding when the labor stayed abroad—and why a “used in the U.S.” standard would radically re‑draw the map. 

The highest‑exposure flows are direct payments to offshore individuals (often documented via Form W‑8BEN‑E for entities or W‑8BEN for individuals) and remittances to foreign agencies or studios supplying labor for U.S. consumption. Marketplace‑mediated gigs also sit near the top: if a platform sits between a U.S. buyer and a foreign freelancer, whoever fits the withholding‑agent role under the new rule will likely be on the hook to collect and report. A parallel hotspot is intercompany shared‑services invoices—cost‑plus charges from foreign affiliates that deliver benefits to U.S. operations. 

Treaty‑resident vendors without a U.S. presence are another watchlist category. Today, their business profits are typically untaxed in the U.S. absent a permanent establishment; a gross levy tied to “use” could bypass that norm unless the statute respects treaty limits. Expect complexity—and refund claims—if treaties aren’t clearly coordinated in the final text. 

Finally, misclassification raises adjacent exposure. The Department of Labor’s Final Rule reinstates a totality‑of‑the‑circumstances test, putting high‑control “contractor” setups under scrutiny. If arrangements effectively function like employment, companies could face wage‑hour liabilities alongside any new tax collection duties. 

Bottom line: map your vendor landscape to where services are performed, how benefits are consumed in the U.S., and who actually pays—those intersections are where a use‑based levy would bite first. 

Key Takeaways: 

  • Direct payments to offshore individuals and foreign agencies are the highest‑exposure flows; documentation via W‑8s will be central. 
  • Marketplace and intercompany service models concentrate risk because payer roles and “use” in the U.S. are clear. 
  • Treaty‑resident providers and misclassified “contractors” add legal complexity; treaty coordination and labor‑law posture both matter. 

Cost, Cash Flow, and Contract Implications for U.S. Buyers 

Cash leaves faster than most models assume: if withholding applies, deposits are due by the 15th day of the month after payment and must be remitted via electronic funds transfer. That cadence can front‑load outflows relative to your invoice approvals and expense accruals. 

Start with mechanics that change the price you pay. The IRS defines the withholding agent and makes it clear the agent is “personally liable” for amounts required to be withheld—if you cover the tax for a vendor, that payment becomes additional income and itself requires withholding under Publication 515. In practice, that means any “keep‑whole” promise can compound the tax base and push total cash costs well above the vendor’s net fee. 

To translate this into a working model, build three scenarios: (1) vendor bears the withholding, (2) you gross up the vendor to a target net fee, and (3) you split workdays and fees across geographies to limit exposure. Gate rates with documentation: require current Form W‑8BEN (or BEN‑E/8233 where applicable) as a condition of payment and automate refreshes ahead of expiry or changes in circumstances. Finally, align treasury calendars so deposits settle on time and reconcile to your year‑end statements and returns. 

Expect edge cases to move the numbers. Engagements with mixed performance locations generally allocate compensation between U.S. and non‑U.S. on a reasonable basis (often time), which can materially shift the portion subject to withholding—confirm your SOWs, time‑tracking, and invoice coding support that allocation under §1.861‑4. 

Don’t ignore liability language in your contracts: the Code makes every person required to withhold “liable for such tax,” so add clear change‑in‑law, documentation, gross‑up/price‑adjustment, and cooperation clauses to avoid being stuck with unpriced tax and penalties. 

Bottom line: tighten documentation, update pricing models for gross‑up math, and re‑time cash calendars so any new withholding obligation doesn’t blindside your budget or your vendor relationships. 

Key Takeaways: 

  • Cash moves early: deposits are due the month after payment and must be made electronically; build treasury calendars and reconciliations accordingly. 
  • Gross‑ups compound cost: if you pay a vendor’s tax, that payment becomes additional income and can increase the withholding base. 
  • Contracts should carry the load: require current W‑8s, add change‑in‑law and price‑adjustment clauses, and define cooperation duties to manage liability. 

Compliance Steps, Contract Updates, and Systems Readiness 

The clock is tight for cross‑border services reporting: recipient statements are due by March 15. Miss documentation and you could trigger backup withholding at 24%—an immediate drain on cash and vendor goodwill. 

Anchor your plan around documentation and reporting that already exist. Forms W‑8 typically remain valid for three full years unless a change in circumstances occurs, so a fast global refresh sets the baseline. From there, structure a 90‑day sprint that covers triage, system rules, contract language, and dry runs—so you can turn on withholding and statements without disrupting payables. 

Day 1–15: Triage and vendor re‑papering. Launch a W‑8/W‑9 refresh with clear “no valid form, no payment” controls, classify each payee (individual vs. entity; direct vs. platform; intercompany), and tag service categories likely to be “used in the U.S.” Day 16–45: Systems and data. Configure AP/ERP for withholding logic, income and recipient codes, and recipient statement generation; build reconciliations from payment records to year‑end reporting. Day 46–75: Contracts and training. Add change‑in‑law, documentation, and gross‑up/price‑adjustment clauses to MSAs/SOWs; train procurement, AP, controllers, and treasury on the new workflows. Day 76–90: Dry runs. Produce test files, issue sample statements, reconcile to deposits, and finalize playbooks for exceptions, refunds, and vendor communications. 

Two specialized checks will save rework. If you settle invoices in crypto or stablecoins, payments in digital assets are treated like property for reporting—ensure valuation at payment time and that withholding and information returns flow the same as fiat. In parallel, embed sanctions screening and re‑screening; U.S. persons are generally prohibited from transactions with parties on the SDN List, so align onboarding and payment blocks with your tax documentation gate. 

Execute this plan and you’ll be positioned to flip from “news alert” to operational compliance—without derailing budgets, vendor relations, or close processes. 

Key Takeaways: 

  • Stand up a documentation‑first workflow: current W‑8s, firm pay‑block rules, and clear mapping of service categories that could trigger U.S. withholding. 
  • Configure AP/ERP for withholding, recipient statements, and reconciliations; practice full dry runs before go‑live to catch data gaps early. 
  • Update contracts for change‑in‑law and tax mechanics, and bake in crypto valuation and sanctions screening to avoid last‑minute compliance surprises. 

Turn a 25% Threat Into a Global Payroll Advantage 

If a use-based levy lands, finance teams will need faster payouts, cleaner documentation, and more control—without disrupting contractors. Bitwage gives you that agility: same-day payments in cryptocurrency, stablecoins, or local currency; W-2–compliant payroll alongside contractor payouts; streamlined invoice management, expense tracking, and automated accounting—all backed by a 10-year, zero-breach security record. With $400M processed for 90,000+ workers at 4,500+ companies across nearly 200 countries, Bitwage helps you keep global teams paid on time while tightening governance. 

Get ahead of potential rule changes by modernizing cross-border payouts and documentation now—so cash flow, compliance, and contractor experience stay aligned. See how Bitwage’s global payroll and stablecoin payouts reduce friction and add control for finance leaders. Ready to move? Signup for Crypto Payroll today! Or, if you prefer a walkthrough first, visit Bitwage to schedule a demo and explore the best-fit setup for your team.