Outsourcing has long been a cost-saving strategy for U.S. businesses, allowing companies to tap into global talent pools and reduce overhead. But the financial equation may soon change. A new proposal in Congress, the Halting International Relocation of Employment (HIRE) Act, is designed to penalize companies that send work abroad. If passed, this law could significantly increase outsourcing costs and reshape how businesses manage foreign labor.
For companies that rely on offshore outsourcing, the stakes are high. Here’s what you need to know.
What the HIRE Act Proposes
The HIRE Act introduces two key measures aimed at discouraging foreign labor outsourcing:
- A 25% excise tax on outsourcing payments made to foreign persons for services that benefit U.S. consumers.
- The denial of deductions for those outsourcing payments, which prevents businesses from writing them off as expenses.
This broad definition of outsourcing payments covers not only wages but also royalties, premiums, fees, and other service-related charges. Even hybrid arrangements, where services benefit both U.S. and foreign customers, would require careful apportionment and documentation.
The proposed effective date is January 1, 2026. Businesses relying on offshore outsourcing have a limited window to prepare for potential changes.
Compliance and Enforcement: Why This Matters
The HIRE Act does not stop at taxes. It comes with significant compliance requirements and stricter enforcement measures.
- Heavier penalties: Businesses that fail to pay the foreign labor tax could face penalties of 50 percent per month, without a cap. The current penalty is 0.5%, capped at 25%.
- Information reporting: The Treasury would have the authority to require new disclosures on outsourcing arrangements, making it harder to avoid the tax through loopholes or transfer pricing.
- Recordkeeping requirements: Companies will need detailed documentation to show how services are allocated between U.S. and non-U.S. consumers.
These provisions make HIRE Act compliance a potential administrative challenge for many businesses.
How the Revenue Will Be Used
The bill directs all revenue into a new Domestic Workforce Fund, designed to:
- Support apprenticeship programs.
- Expand worker training and reskilling initiatives.
- Provide grants to states for workforce development.
While the fund is meant to strengthen the U.S. labor market, businesses will face the immediate pressure of higher outsourcing costs and additional compliance obligations.
Who Will Be Most Affected?
Some industries are more exposed than others to rising outsourcing costs under the HIRE Act.
- IT and software development: Offshore coding, design, and support teams will become significantly more expensive.
- Business process outsourcing (BPO): Services such as payroll, HR, and data entry handled abroad could face steep cost increases.
- Accounting and auditing firms: Many firms that use offshore back-office support will see reduced margins.
- Customer service and call centers: Outsourced support in countries such as India or the Philippines may lose its cost advantage.
Foreign providers in India, Mexico, and the Philippines would feel the impact, but U.S. companies that rely on them will bear the costs most directly.
The Broader Economic Impact
Lawmakers argue the HIRE Act will encourage companies to bring jobs back to the U.S. However, critics warn that the result could be higher prices for businesses and consumers. If outsourcing costs increase by nearly 50 percent or more, companies may choose to pass these costs on rather than reshoring jobs.
This creates ripple effects across the economy:
- Businesses will spend more to maintain outsourcing contracts.
- Consumers could see price increases as companies shift the burden.
- Administrative resources will be redirected toward compliance instead of innovation and growth.
Is the HIRE Act a Done Deal?
Not yet. The HIRE Act remains a proposal, and its future in Congress is uncertain. Similar measures have faced political hurdles before. That said, businesses cannot afford to ignore it. The short timeline before its effective date leaves little room for last-minute adjustments.
Even if the bill does not pass in its current form, it signals a growing trend. Policymakers are increasingly targeting offshore outsourcing, and businesses should expect future efforts to limit reliance on foreign labor.
Why Planning Ahead Matters
Whether or not the HIRE Act becomes law, the risks of waiting are clear. Businesses that fail to plan could face:
- Sharp increases in outsourcing costs.
- Contractual disputes with offshore providers.
- Higher tax liabilities and penalties.
- Disruption to operations due to rushed HIRE Act compliance.
Early planning is essential. Businesses should begin reviewing contracts, modeling cost impacts, and exploring alternative structures now.
How Scout Tax Can Help
At Scout Tax, we help businesses navigate complex and fast-changing tax environments. Our team can:
- Analyze how the HIRE Act or similar legislation could affect your outsourcing costs.
- Build strategies that reduce tax exposure and ensure compliance.
- Model scenarios to guide outsourcing and hiring decisions.
- Provide proactive updates on legislative developments.
With expert planning, your business can stay agile, protect profitability, and remain compliant in the face of new tax rules.
Take Action Before It Is Too Late
The HIRE Act may still be a proposal, but if your business relies on foreign labor or offshore outsourcing, the time to act is now. Companies that delay preparation may face higher costs, compliance challenges, and costly penalties.
Contact Scout Tax today to prepare for the HIRE Act, safeguard your operations, and protect your bottom line. With the right guidance, your business will be ready for whatever comes next.
