Paying foreign contractors: when US withholding applies and which forms you file

If your US company is paying someone outside the country, the question that decides everything is not where you are or where they are. It is where the work is physically performed.

Services performed outside the United States by a non-US person produce foreign-source income. There is no US withholding on it and nothing to report to the IRS. Services performed inside the United States produce US-source income, and the default position is 30% withholding unless a treaty or another exception applies.

That single distinction resolves most of the confusion in this area. Here is how to establish it, what to collect before the first payment, and which forms follow.

Where the work is performed decides everything

For compensation for services, the source of the income is the place the services were rendered. Nothing else moves it: not your location, not the currency, not where the contract was signed, not where the money was sent from.

A developer in Bengaluru writing code for your US company, working entirely from Bengaluru, is earning foreign-source income. No US withholding applies and no US reporting is required for those payments.

The same developer flying to your San Francisco office for three weeks is earning US-source income for those three weeks. That portion is subject to withholding, and the apportionment is normally made on the basis of time.

This is the part companies get wrong in both directions. Some withhold on everything out of caution, which shortchanges the contractor for no reason. Others assume nothing is ever reportable and miss a genuine obligation when a contractor visits.

Collect a W-8 before the first payment

Documentation is what lets you treat a payee as foreign. Without it, you are not entitled to assume anything.

Form W-8BEN is for individuals. Form W-8BEN-E is for entities. Collecting the wrong one for the payee type is a common administrative error and it invalidates the documentation.

A W-8 is generally valid until the end of the third calendar year after it is signed, so a form collected in one year expires three years later and has to be refreshed. Companies that collect once at onboarding and never revisit it end up with an undocumented payee without noticing.

The consequence of having no valid form is specific. Without documentation establishing foreign status, you may be required to treat the payee as a US person, apply backup withholding at 24%, and issue a Form 1099. That is the scenario to avoid, and it is entirely a paperwork failure rather than a tax one.

Treaty relief on services uses Form 8233, not W-8BEN

This is the technical point most guidance gets wrong.

Form W-8BEN establishes foreign status and is the right form for claiming treaty benefits on passive income such as interest, dividends, and royalties. It is not the form for claiming a treaty exemption on payment for personal services.

A nonresident individual claiming a treaty exemption on compensation for independent personal services performed in the United States uses Form 8233 instead. It goes to the withholding agent, who submits it to the IRS, and there is a waiting period before the exemption can be relied on.

Either route generally requires the contractor to have a US taxpayer identification number. For someone ineligible for a Social Security number, that means applying for an ITIN, which takes time and is worth starting well before the payment is due rather than at the point it becomes urgent.

Foreign contractors do not receive a 1099

Form 1099 reports payments to US persons. A properly documented foreign contractor is outside that system entirely.

Where the payment is foreign-source, meaning the work was done abroad, there is no US information return at all. You keep the W-8 on file to support that position and report nothing.

Where the payment is US-source, the reporting form is Form 1042-S, issued to the contractor, with Form 1042 filed as the annual withholding return. This applies whether or not tax was actually withheld, so a treaty-exempt payment for US-performed services is still reportable.

The only route by which a foreign contractor ends up on a 1099 is the documentation failure described above, where the absence of a valid W-8 forces you to treat them as a US person.

Inkle files Form 1099 and the W series for contractor and payee reporting, and files Form 1120 and Form 5472 for foreign-owned US companies, which is the same paperwork discipline applied at the entity level rather than the payee level.

The reporting deadline is March, not January

Companies that have run US contractor payments before carry the wrong date in their heads.

Forms 1099 for US contractors are generally due at the end of January. Form 1042-S and Form 1042 are due in mid-March. They are separate systems with separate deadlines, and treating them as one calendar is how a first 1042-S gets filed late.

Deposits are a further layer. Where tax is actually withheld, it is deposited on a schedule during the year rather than settled with the annual return.

Misclassification risk sits in their country, not yours

The classification discussion in most US guidance uses the IRS tests for employee versus contractor. Those tests are largely irrelevant when the worker is abroad.

What applies is the labor law of the country where the person is working. Many jurisdictions apply tests considerably broader than the US ones, weighing economic dependence, exclusivity, and duration of the relationship rather than just control over how the work is done. A long-running, full-time, exclusive engagement looks like employment in most of them regardless of what your contract says.

The consequences are local too: back social security contributions, mandatory benefits, severance entitlements, and penalties assessed by that country's authorities rather than by the IRS.

There is a second exposure worth naming. Depending on what the person does and how much authority they have, engaging someone in another country can create a taxable presence for your company there, which brings filing obligations in that jurisdiction. Someone habitually concluding contracts on your behalf is the clearest case.

Neither of these is something a US filing resolves. They need local advice in the country concerned.

The bottom line

Establish where the work is physically performed before anything else, because that determines whether US withholding and reporting apply at all, and for most offshore contractors the answer is that they do not. Collect the right W-8 for the payee type before the first payment and track its three-year expiry, since the cost of undocumented status is backup withholding and a 1099 you should never have issued. Use Form 8233 rather than W-8BEN when a nonresident individual is claiming treaty relief on services performed in the US. And remember that classification risk is governed by the law where the contractor sits, not by the IRS tests, which is a separate problem requiring separate advice.

Frequently asked questions

Do I withhold US tax when paying a contractor abroad?

Not if the work is performed outside the United States. Compensation for services is sourced to the place the services are rendered, so work done entirely abroad by a non-US person is foreign-source income with no US withholding and no US reporting. Work performed inside the United States is US-source and subject to 30% withholding unless a treaty or exception applies.

Which W-8 form do I need?

Form W-8BEN for an individual and Form W-8BEN-E for an entity. Collect it before the first payment. It is generally valid until the end of the third calendar year after signing, after which it must be refreshed.

Do foreign contractors get a 1099?

No. Form 1099 reports payments to US persons. A documented foreign contractor is reported on Form 1042-S where the income is US-source, and not reported at all where it is foreign-source. The exception is where you hold no valid W-8, in which case you may have to treat the payee as a US person, withhold at 24%, and issue a 1099.

What happens if I never collected a W-8?

You lose the ability to treat the payee as foreign. That generally means backup withholding at 24% on the payments and a Form 1099, and the liability for under-withholding sits with you as the payer rather than with the contractor.

How does a contractor claim a tax treaty exemption?

For compensation for personal services performed in the United States, a nonresident individual uses Form 8233 rather than Form W-8BEN. It is submitted through the withholding agent, there is a waiting period before the exemption can be applied, and a US taxpayer identification number is generally required.

Can hiring a contractor abroad create problems in their country?

Yes, in two ways. Local labor law may reclassify a long-running exclusive engagement as employment, bringing back contributions, benefits, and severance under that country's rules rather than US ones. Separately, someone acting with sufficient authority on your behalf can create a taxable presence for your company in that country.