Paying contractors abroad: forms and withholding

Does a US business send Form 1099-NEC to a foreign contractor who works abroad?

Generally, no. A documented foreign person's pay for services performed entirely outside the US is foreign-source income, normally outside US withholding and information-return reporting. Form 1099-NEC is the domestic contractor form; US-source nonemployee compensation paid to a foreign person instead generally goes on Form 1042-S (IRS: foreign-source income; IRS: contractor reporting).

The contractor's mailing address, invoice currency, bank account, and the US location of your business do not establish where the services happened. The place of performance generally controls the source of service income, regardless of where the contract was made or payment sent (IRS: source of personal service income). Establish both the payee's tax status and the work location before treating the payment as foreign-source.

Which status form should I request from a foreign individual or company?

Request the form that matches the person who is treated as receiving the income, preferably before payment. A valid W-8 can establish foreign status for domestic information reporting; keep it in your records rather than sending it to the IRS (IRS: instructions for W-8 requesters).

Review a form if its address, classification, owner, or treaty claim conflicts with what you know. A form is not reliable merely because every box is filled (IRS: Publication 515).

Does US withholding apply when all services are performed outside the US?

Generally, no US nonresident withholding applies to a foreign person's pay for services performed entirely abroad. That pay is generally foreign-source, even when a US business signs the contract and pays from a US account; it also normally needs no Form 1042-S (IRS: source of personal service income; IRS: foreign-source income).

Before paying, collect the income owner's matching W-8, invoice, and a dated work-location record. No Form 8233 treaty claim is needed for services performed entirely abroad (IRS: instructions for W-8 requesters; IRS: Form 8233 instructions).

Do not treat the whole invoice as foreign-source if it also pays for US work or for something other than services, such as a license. Identify what each payment buys and where each service was performed before deciding the US reporting and withholding treatment (IRS: Publication 515).

What changes if the contractor performs some services while physically in the US?

The part of a foreign contractor's fee attributable to services performed in the US is generally US-source. For services performed in both places, make an accurate allocation; the IRS generally uses US service days divided by total service days for the pay period (IRS: source of personal service income).

A narrow statutory exception treats US work as foreign-source if a nonresident individual is temporarily in the US for no more than 90 days in the tax year, aggregate US-service pay does not exceed $3,000, and the contract is with a qualifying foreign payer or the foreign office of a US payer. A contract with your usual US office does not qualify (US Code: section 861(a)(3)).

US-source independent service pay to a nonresident individual generally calls for withholding at 30% unless an applicable exception or properly supported treaty claim changes it (IRS: pay for personal services; IRS: Publication 515). The withholding answer for a foreign entity depends on its tax classification, who owns the income, and its documentation. A W-8BEN or W-8BEN-E alone does not prove that US work is exempt from withholding (IRS: instructions for W-8 requesters). The contractor's own US filing position is a separate question covered by When foreign owners owe US tax.

For an individual's last US service payment of the year, an IRS letter may reduce withholding on up to $5,000; the contractor must obtain the letter and give it to the payer before using the exemption. An IRS withholding agreement can also change the amount for covered payments (IRS: Publication 515).

These are federal rules. California also generally withholds 7% once a nonresident's California-source payments exceed $1,500 in a calendar year. The payer files Form 592 and gives the contractor Form 592-B. The payee can give Form 587 to allocate mixed-location work or, if eligible, Form 590 to claim exemption; the payee must obtain FTB approval of a Form 588 waiver or Form 589 reduction before payment. Other states have different rules (California FTB: nonresident withholding; California FTB: Form 589 instructions).

When must I file Forms 1042 and 1042-S, even if a treaty removes withholding?

Report US-source independent service compensation paid to a foreign person on Form 1042-S when the IRS reporting rules cover it. A treaty exemption from withholding does not by itself remove Form 1042-S reporting. If you must file Form 1042-S, you must also file the annual Form 1042 (IRS: Form 1042-S instructions; IRS: contractor reporting).

For 2026 payments, file and furnish Forms 1042-S and file Form 1042 by March 15, 2027. If required to e-file Form 1042-S, use IRIS (IRS: Form 1042-S instructions; IRS: Form 1042 instructions). File Form 8809 by that date for an automatic 30-day extension to file Form 1042-S; Form 7004 by that date gives an automatic six-month Form 1042 filing extension. Neither postpones tax deposits or furnishing recipient copies. To request a separate recipient-copy extension, send Form 15397 by March 15, 2027; approval can grant up to 30 days (IRS: Form 1042-S instructions; IRS: Form 1042 instructions).

For California services paid in 2026, file Form 592 and remit withholding for January–March, April–May, June–August, and September–December by April 15, June 15, September 15, 2026; January 15, 2027, respectively; give Form 592-B to the payee by February 1, 2027 (California FTB: Form 592 instructions; California FTB: Form 592-B instructions; California FTB: Publication 1017).

Deposit withheld tax electronically: if undeposited tax reaches $2,000 at a quarter-month's end, deposit within three business days; if it is at least $200 but below $2,000 at month's end, deposit within 15 days. A year-end balance below $200 can be paid with Form 1042 by its due date (IRS: Form 1042 instructions). Late filing of each correct Form 1042-S can cost $60 within 30 days, $130 through August 1, or $340 afterward. Missing a recipient copy can bring a separate penalty up to $340; intentional disregard costs the greater of $690 or 10% of items required to be reported (IRS: Form 1042-S instructions). A late Form 1042 can cost 5% of unpaid tax per month, up to 25%; late payment usually costs 0.5% per month, up to the same cap (IRS: Form 1042 instructions).

Does a Canadian contractor's treaty claim change which form I collect?

Yes, if a Canadian-resident individual claims a treaty withholding exemption for services performed in the US, the individual generally gives you Form 8233 for that compensation. Form 8233 needs the individual's US taxpayer ID; if an SSN or ITIN is pending, attach a copy of the completed application. Form W-8BEN can document foreign status, but it is not the form for an individual's treaty exemption on US personal services (IRS: Form 8233 instructions; IRS: W-8BEN instructions).

Canadian residence alone does not establish that the treaty exemption applies. If the individual is resident in both countries under domestic law, apply the treaty's Article IV residence tie-breaker. Check the treaty article claimed, US presence, and whether the contractor has a US permanent establishment under the treaty before accepting Form 8233 (IRS: Canada–US treaty; Treasury: Canada–US treaty protocol). The individual completes a separate Form 8233 for each tax year and signs Part III; you sign Part IV. If you accept the claim, send a copy to the IRS within 5 days and wait at least 10 days after mailing before using the exemption. If later facts defeat the claim, notify the IRS and withhold on unpaid amounts (IRS: Form 8233 and instructions; IRS: Form 8233 instructions). A Canadian corporation's treaty claim follows its entity classification and documentation rules, usually starting with Form W-8BEN-E rather than an individual's Form 8233 (IRS: instructions for W-8 requesters; IRS: Publication 515). For the contractor's two-country returns, see Canadian freelancers with US clients.

What if the contractor will not provide a valid status or treaty form?

First distinguish a missing foreign-status form from a missing treaty claim. If foreign status is documented but a valid treaty claim for US services is not, do not use the treaty exemption; determine withholding and Form 1042-S reporting for US-source pay. If payee status is undocumented, apply IRS presumption rules before payment to determine foreign-person withholding and reporting or domestic reporting and backup withholding. An overseas invoice alone proves neither status nor exemption (IRS: instructions for W-8 requesters; IRS: Publication 515).

If a payment has already been made, reconstruct its work location, payee status, and any tax withheld before deciding whether a correction or filing is needed (IRS: Publication 515).

The withholding agent—whether a sole proprietor, partnership, or corporation—owes tax it was required to withhold under section 1461 without a willfulness test; for a sole proprietorship, that is the proprietor personally. If the foreign payee pays the tax, the agent no longer owes that tax but can still owe interest and penalties. An owner, officer, or other responsible person who willfully fails to collect or pay it over can separately face a section 6672 penalty equal to the unpaid tax. Assessment is generally allowed for 3 years after a return is filed, but at any time if no return is filed; statutory exceptions can extend the period (IRS: Publication 515; US Code: sections 1461, 6501 and 6672).

For California withholding, Revenue and Taxation Code section 18668 makes the person required to withhold liable for missed tax unless reasonable cause applies. Once a state liability becomes due and payable, the FTB generally has 20 years to collect; pauses or later liabilities can change that period (California law: section 18668; California FTB: collection time limit).

What records prove the work location and support the expense?

Keep records that show who did the work, what the business paid for, where the services were performed, and how each mixed-location invoice was split. Workday records support the IRS time-based allocation, while contracts, invoices, and proof of payment support the amount recorded in the books (IRS: source of personal service income; IRS: business records).

• Keep the signed agreement, scope of work, invoices, payment confirmations, and any travel or workday log showing country, dates, and tasks.
• Keep the W-8 or W-9, any Form 8233 and treaty support, and the reason you accepted the form. W-8 forms stay in your records; accepted Forms 8233 have a separate IRS submission step (IRS: instructions for W-8 requesters; IRS: Form 8233 instructions).
• Reconcile each invoice to the payment and to any Form 1042-S. For a split invoice, retain the calculation that assigns pay to US and foreign service days (IRS: source of personal service income).

What if the contractor is a US citizen or resident living abroad?

A US citizen or US tax resident is a US person for these form rules, even if the work is done abroad. Request Form W-9, not a W-8. Form 1099-NEC generally applies when reportable nonemployee compensation paid to that individual reaches $2,000; backup withholding can require the form below that amount (IRS: W-8BEN instructions; IRS: Form 1099 reporting requirements). Living outside the US does not turn a US person into a foreign payee for Forms 1042-S and 1042 (IRS: Publication 515).

Example

Illustrative amounts are in US dollars. A US business agrees to pay a nonresident individual $10,000 for 20 service days. The contractor performs 15 days abroad and five days in the US. A supported time allocation assigns $7,500 to foreign-source services and $2,500 to US-source services. Without an applicable exception or valid treaty exemption, the usual 30% withholding on the US-source part would be $750. The business generally reports the US-source part on Form 1042-S and files Form 1042. For this case, Form 1042-S shows income code 17 in box 1, $2,500 of gross income in box 2, and $750 withheld in box 7a (IRS: 2026 Form 1042-S). If a valid treaty claim removes the withholding, those reporting forms are still generally required (IRS: source of personal service income; IRS: Form 1042-S instructions).

Different for you?

• The worker may be an employee: classification changes payroll and form rules. See Contractors who may be employees.
• The contractor worked in the US or claims a treaty exemption, or a status form is missing: gather the contract, workday log, residency and status forms, invoices, and payment history for bookkeeping help.
• You need the contractor's own US tax answer: see When foreign owners owe US tax.
• The contractor is a Canadian freelancer filing in both countries: see Canadian freelancers with US clients.
• Your US LLC has a foreign owner: its separate annual owner reporting is covered by Foreign-owned single-member LLC filing.
• You missed a required domestic contractor form: see Late contractor and employee tax forms. For past foreign-contractor payments with US workdays, bring the payment and withholding records to bookkeeping help.