I'm considering hiring a software developer in Germany. He's a student so he's unlikely to have any type of corporate structure set up. I've had numerous conversations with him online, and we get along, well.
What should I be wary of? How should I structure the engagement so that him and I are adequately protected? I also want to make sure we're covering our bases from a tax perspective
I'm a software developer myself, so I know all about the cons of offshoring. I'm more concerned about the structure of the business arrangement.
As you will be using this student as an independent contractor, then you can create an agreement with him which sets out clearly his obligations, and makes it clear that you are not in any partnership or agency arrangement with him. This would follow the same format as for a contract of services with a US individual, but should contain a clause that the agreement will be interpreted in accordance with your local laws.
As indicated by Alex, provided you protect yourself in the sense of ensuring that payment follows the provision of the services, then the risks of him failing to fulfil his obligations may be limited to the time you will lose in completing the project if you have to get someone else in to finish it. However, if you have obligations of your own to fulfil (eg to clients) which might be affected by any delay, this will need to be thought through carefully.
You will also need to ensure that your agreement with him fairly sets out your responsibilities to him - an agreement should be just that, not a one-sided document, but one intended to protect the interests of both parties.
One question which you will need to consider is whether this student could be regarded by the authorities as being employed by you. I am neither a US lawyer nor an employment lawyer, but I do know that if he were in the UK, his status as a student would not prevent him from being regarded as an employee if certain situations, and that this could make you liable to deduct tax etc..
It's simple: you've got the money and he's got the time, and you know what they say talks. I'd simply agree to some specs before hand and pay him only after delivery. Neither of you are going to sue each other for breach of agreement, and generally speaking it's much worse to lose money than to lose time.
From a tax perspective, you're supposed to send 1099 forms to US vendors (over $600 I think) so that the IRS "knows" how much money they make. Since overseas vendors don't pay US taxes, there's no requirement to send them such a form. Like anything else, just make sure you have adequate invoices so that you can justify your payments to him as business expenses.
As for him... that's up to him or his parents to figure out. If he were in the US, I'd say he'd just need to fill out a Schedule C on his 1099. So, whatever the equivalent is of that over there. But again, his taxes are his responsibility, not yours.