Personally I would prefer local for many reasons. It is easier and often cheaper to hire from local colleges and universities, or even pick up some high school students. If their portfolio of work looks good generally the artwork they produce is presentable at a reasonable cost, they're happy because they can report that they worked on a game. Best case is you find someone with great skills who commits to work with you long term.

Hiring students/graduates is comparable to when you're outsourcing because you want cheap work... but it's apples and oranges to outsourcing because you want the highest quality work.
To add another perspective, we (GOATi) do outsourcing management for clients who want higher quality work than what they can do themselves, or equal quality with the flexibility that contractors give you (e.g. you can hire them for just a day/week/month as needed). We get clients from AAA to indie games, film/TV, etc, who want the best quality, not the cheapest price. From a US perspective, we're foreign... and from a local (Australian) perspective, we often sub-contract work out to foreigners too -- we send the work wherever the talent happens to be

Thanks all, I know you're not IANAL hive mind, but I still appreciate your wisdom, tips and personal experiences working with foreigners

The most common form when dealing with payments to foreigners is the W8-BEN, which is meant for non-resident, non-US-citizen inviduals for services performed abroad; and hence this form has the appropiate fields to fill in foreign data (e.g. doesn't expect the person to have an SSN number).
You need your contractor to sign the W8-BEN and return it to you so you have proof that he is non-resident, non-US-citizen and that you did right in withholding / not withholding tax when you paid him (you may still have to fill other forms to inform the IRS).

Thanks for the scoop on that, it's all good to know. I am still waiting for official answer from my attorney, who has been getting pretty unresponsive lately :/

Also, for you to employ a foreigner, they'd have to have a US work visa, which is hard to get, making it pretty unlikely that they'd be eligible to be your employee.

Yeep, which is why I am sticking to independent contractors. Definitely not at the level to be sponsoring Visas... maybe one day!

I've worked with various international groups before and dislike it. Details matter, but cultural barriers, communications difficulties, time zone frustrations, and other concerns tend to be secondary costs you might not consider. I cannot recall how any bad drafts needed rework, how many times people said they would fire off some emails and hear back in the morning which turns into a week of back-and-forth, how many times the work ethic was different and caused problems.

True, which is why you have to be extra sure with the particular person. But I am also used to doing that myself (used to work for US companies while living on the other side of the world) so I guess I am a bit more lenient in that department. Not to mention I am a foreigner myself (greencard holder, but still).

Personally I would prefer local for many reasons. It is easier and often cheaper to hire from local colleges and universities, or even pick up some high school students.

Yea that's a great option too. Sadly I didn't have much luck finding the skills I want among students this time around and don't have time to keep searching for someone.

Also, for you to employ a foreigner, they'd have to have a US work visa, which is hard to get, making it pretty unlikely that they'd be eligible to be your employee.

Yeep, which is why I am sticking to independent contractors. Definitely not at the level to be sponsoring Visas... maybe one day!

Contracting a foreigner is not the same thing as hiring a foreigner for a full-time job within the United States. Contractor who's not here doesn't need a visa.