Paying Foreign Contractors from a U.S. Business: 1099, W-8BEN and Withholding Rules

A U.S. business generally does not issue Form 1099-NEC to a foreign contractor who is a nonresident and performs all of the work outside the United States. That income is foreign-source, so there is usually no U.S. withholding and no 1099 or 1042-S. Instead, you collect Form W-8BEN (individuals) or Form W-8BEN-E (companies) and keep it on file to document why. The rules change if the contractor is actually a U.S. person — including U.S. citizens living abroad — or if any of the work is performed while the contractor is physically in the United States.

Step 1: Is the contractor a U.S. person?

Citizenship of the business does not matter; the contractor's tax status does. U.S. citizens, green card holders and people who meet the substantial presence test are U.S. persons wherever they live. A U.S. citizen freelancing from Lisbon gives you a Form W-9, and you issue a Form 1099-NEC if payments exceed the reporting threshold — exactly as for a contractor in Ohio. A nonresident individual or a foreign company gives you a Form W-8BEN or W-8BEN-E instead.

Step 2: Where is the work performed?

For services, the source of income is generally where the work is physically done, not where the client, the contract or the bank account is located.

• Work performed entirely outside the United States by a nonresident: foreign-source income. Generally no U.S. withholding and no Form 1099 or 1042-S.
• Work performed inside the United States by a nonresident: U.S.-source income. Generally subject to 30% withholding unless an exemption or treaty applies, and reported on Forms 1042-S and 1042.
• Mixed situations — for example, a developer who spends two weeks on-site in Miami: the U.S. days are U.S.-source and the rest is foreign-source. Contracts and invoices should make the split clear.

Collecting Form W-8BEN or W-8BEN-E

Ask for the form before the first payment, as part of onboarding. The contractor completes it and returns it to you; it is never sent to the IRS. Check that the name matches the contract and invoices, the country of residence is filled in, the form is signed and dated, and the right version was used: W-8BEN for an individual, W-8BEN-E for a company. A W-8 form is generally valid until the end of the third calendar year after signing, so build renewals into your vendor records.

When a foreign contractor works in the United States

If a nonresident performs services while in the United States, your business is generally a withholding agent and must withhold 30% of the payment unless an exemption applies. The main options are:

• Form 8233: a nonresident individual claiming a treaty exemption for independent personal services gives you Form 8233, which you review and send to the IRS before relying on it.
• Form W-8ECI: a foreign person whose income is effectively connected with a U.S. trade or business can certify that, removing the 30% withholding; they then file their own U.S. return.
• Form W-8BEN-E with a treaty claim: a foreign company may claim that its business profits are not taxable in the U.S. because it has no permanent establishment here.

Any withholding is deposited with the IRS, reported to the contractor on Form 1042-S, and summarized on Form 1042. Both are generally due March 15 of the following year.

Practical examples

• A Miami marketing agency pays a graphic designer who lives and works in Buenos Aires. The designer gives a W-8BEN. No withholding, no 1099, no 1042-S. The agency keeps the W-8BEN and invoices with its books.
• A Florida software company pays a Colombian development firm for work done in Medellín. The firm gives a W-8BEN-E. Same result: no U.S. withholding or 1099.
• The same Colombian firm sends a developer to Florida for a three-week implementation. The fees for those U.S. days are U.S.-source; unless the firm documents an exemption, the company withholds 30% on that portion and issues a Form 1042-S.
• A U.S. citizen copywriter living in Mexico City gives a W-9. The company issues a Form 1099-NEC, even though the work was done abroad.

Payment platforms and employer-of-record services

When you pay through a platform such as an employer-of-record or contractor-management service, the platform may collect W-8 forms and handle reporting for you. Confirm in writing who is responsible. If you pay contractors directly by wire, card or a payment app, the documentation responsibility stays with your business.

Deductions and recordkeeping

Payments to foreign contractors are generally deductible business expenses just like payments to U.S. contractors, as long as they are ordinary and necessary for the business. Keep the contract, invoices, proof of payment and the W-8 form together. If the IRS questions why no 1099 was issued, the W-8 form and evidence of where the work was performed are your answer.

Contractor or employee?

U.S. payroll rules generally do not reach a non-U.S. worker working entirely abroad, but the worker's own country may have employment and social security rules that treat a long-term, full-time "contractor" as an employee. That is a local-law issue, not a U.S. tax form issue, and it is worth checking before a contractor relationship becomes permanent.

Common mistakes

• Issuing 1099-NECs to foreign contractors who work abroad, or asking them for a W-9.
• Paying for months with no W-8 form on file.
• Not withholding when a foreign contractor performs work in the United States.
• Treating U.S. citizens abroad as foreign contractors.
• Accepting a W-8BEN from a company, or a W-8BEN-E from an individual.
• Letting W-8 forms expire without renewing them.

How Chirino USA can help

We help U.S. businesses set up a simple onboarding process for international contractors, review W-8 and W-9 forms, determine when withholding applies, and prepare Forms 1042 and 1042-S when it does. Schedule a free consultation or message us on WhatsApp.

Sources and official references

• IRS — NRA Withholding
• IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
• IRS — About Form W-8BEN
• IRS — About Form W-9
• IRS — About Form 1099-NEC
• IRS — About Form 8233