Aside from the intrinsic value of having local contractors that are easily accessible and speak the same language, there is a value of keeping your contractors that you hire local and in the US.

There are tax incentives in place for keeping production activity in the US, and in some cases may offset the up front savings of looking for contract work overseas.

The R&D tax credit and the domestic production deduction can offset a companies tax liabilty by enough to make it worth it. An example of a small video game developer below:

Over three years of development the video game developer accrues:

  • $200,000 domestic wages
  • $60,000 contractor 1099 expenses (foreign and/or domestic)
  • $10,000 in computer leasing expense

The company releases its video game and earns $500,000

Typically the tax bill would be $175,000 for someone who has no accounting system in place, but lets assume they understand a basic accounting and deduct the expenses based on accrual system. this leaves them with a tax bill of around $70,000.

Assuming the contractors hired were outside the US, and Utilizing the R&D credit and domestic production deduction on all other activities, they are left with a $40,000 tax bill

If the contract work was completed by someone IN the US, the tax bill would be $8,000 less at $32,000.

In this situation, if the company chose to pay contractors within the US, they would have saved $8,000. The bottom line is companies should take this into consideration before thinking about how much they save by hiring overseas.