The 25% Tax on Outsourcing: How U.S. Companies Can Stay Competitive Without Crossing Borders

For decades, U.S. companies have relied on a simple equation: offshore labor costs less, onshore costs more. That model drove trillions of dollars in cross-border payments for IT development, customer support, back-office operations, and specialized services. But in 2025, two legislative measures fundamentally rewritten the rules of employment.

First came the H-1B Executive Order, imposing a $100,000 fee per visa application – a move that effectively prices out visa-based hiring for most mid-market firms. Then came the HIRE Act, a proposed bill that introduces a 25% tax on outsourcing payments to foreign contractors servicing U.S. customers.

Together, these policies don’t just raise costs. They force companies to rethink the entire structure of global hiring. The question is no longer whether to use offshore talent, but how to access it without triggering punitive taxation. Here is your guide on the legislative changes and an industry outlook on how your business will be affected.

Why the 25% Tax on Outsourcing Changes Everything

The HIRE Act targets a specific vulnerability in current tax law: payments made to foreign persons for services consumed by U.S. customers have historically been deductible business expenses. Under the new proposal, those payments would lose their deductibility and face an additional 25% tax on outsourcing.

The bill defines “outsourcing payments” broadly: any fee, royalty, or service charge paid to a foreign person in the course of business, where the benefit is directed to U.S. consumers. There are no carve-outs for foreign affiliates, no exceptions for strategic partnerships, and no provisions to coordinate with existing tax structures like the Base Erosion and Anti-Abuse Tax (BEAT). Thus, the new 25 percent tax on outsourcing represents a structural inflection point for companies in technology, finance, healthcare IT, and business services.

According to analysis by RSM, one of the Big Four accounting firms, this dual penalty creates an effective cost increase of 40-45%. A $1 million payment to an offshore development team would now cost approximately $1.45 million after accounting for lost tax benefits and the new excise levy.

The HIRE Act Explained: From Policy to Real Numbers

While the logic behind the HIRE Act is clear, with the government targeting the drain of revenue from local businesses overseas, its practical impact is punitive. Consider a typical scenario:

Before the HIRE Act:

• A U.S. fintech company pays $2 million annually to an offshore data analytics team.
• After standard corporate tax deductions, the effective cost is approximately $1.58 million.

After the HIRE Act:

• The same $2 million payment triggers a 25 percent tax on outsourcing: $500,000.
• The payment is no longer deductible, eliminating $420,000 in tax savings.
• Total cost: $2.92 million.

The new formula marks a complete reversal of the cost advantages that made offshore contracting viable in the first place.

Moreover, the bill includes anti-abuse provisions to prevent rerouting payments through U.S. territories or shell entities. According to legal analysis from Cullen and Dykman LLP, the legislation is designed to capture “any payment structure where foreign labor ultimately benefits U.S. consumers,” regardless of how the contract is structured.

Industries Under Pressure: Who Pays the Price

While the 25% tax on outsourcing applies universally, its impact will be felt most acutely in sectors with high offshore dependency:

• Technology and Software Development. Companies relying on engineering teams in India, Eastern Europe, or Latin America face immediate exposure. A mid-sized SaaS firm with 50 offshore developers could see annual costs increase by $1.5-2 million.
• Financial Services and Fintech. Back-office operations, compliance functions, and data processing teams are frequently offshored aspects of business functioning. Banks and payment processors with large-scale offshore operations will also need to reevaluate vendor contracts and internal cost models.
• Business Process Outsourcing (BPO). Customer service, technical support, and administrative functions will be directly impacted as well. Companies like McDonald’s or Delta Airlines that use offshore call centers would face millions in additional costs.

As RSM’s analysis notes, even large corporations subject to BEAT could face overlapping liabilities: a 25 percent tax on outsourcing under the HIRE Act and a 12.5% BEAT penalty on the same payments look pretty intimidating. This double taxation scenario creates unprecedented compliance complexity.

How GEOR Solves the 25% Tax Problem

While most firms are still evaluating the policy implications, forward-thinking companies are already implementing compliant alternatives. That’s where GEOR’s model becomes essential.

Through our U.S.-registered entity, Geomotiv, we provide a legal and financial structure that allows companies to maintain distributed global teams without triggering the HIRE Act’s penalties.

Here’s how it works:

This structure allows clients to:

• Avoid the 25% excise tax by keeping payments within the U.S.
• Preserve full tax deductibility of labor costs.
• Access global talent pools in Eastern Europe, Latin America, and Asia without regulatory risk.
• Maintain operational flexibility as legislation evolves.

In practical terms, a company paying $3 million annually for offshore development services would face a $4.35 million total cost under the HIRE Act. By routing those services through GEOR’s U.S. entity, they retain the $3 million baseline cost, saving over $1.3 million per year.

The Path Forward

The 25% tax on outsourcing signals a fundamental shift in how the U.S. government views global hiring. As the HIRE Act moves through Congress and the H-1B fee takes effect, one truth remains constant: policy risk is business risk. Therefore, only adaptive businesses can thrive in the new environment.

Whether the HIRE Act is passed in its current form or not, the direction is clear: cross-border labor payments will face increasing scrutiny, higher costs, and stricter compliance pressure. For companies that continue with legacy offshore hiring models, the risks are mounting. Those that adopt compliant hybrid frameworks leverage U.S.-based employment structures to manage global teams and turn the evolving regulatory environment into a competitive advantage.

GEOR provides the infrastructure to make that transition seamless. We handle compliance, employment law, payroll, and tax reporting, so our clients can focus on building great products and serving their customers.