Foreign Contractors and US Companies
One of the many issues with a global economy and the growing popularity of digital nomads and freelancing are the tax implications across borders. What tax considerations are important when a US company makes a payment to a non-US independent contractor? Does the company need to withhold taxes? Is the foreign contractor required to submit a United States tax return? Does the company need to issue a Form 1099?
1099 Required for US persons
If the contractor does not meet the definition of a “US person”, and all of the services performed by the contractor occurred outside of the United States, then withholding MAY not be required, and Form 1099 need not be issued - provided that the country of residence has a tax treaty with the US.
Without the 1099, it is important to keep good records to substantiate any deduction, including who the payment was made to, why the payment was made, and the amount.
Although tax law is clear, it hinges on whether or not the contractor is a “US person”, so how does a company determine this? Request W-8 from the contractors to certify their foreign status. Keep this form on file in the event you are audited. It will support why you did not withhold tax and why you did not issue a 1099.
Also, a Form 1042 does not need to be used for services performed outside of the United States.
Unsure if they are a US person?
If you have any doubt about the requirement to withhold, go ahead and do it and use a Form 1042. In the event that there was a withholding requirement, you can be liable for any tax that was not withheld. If your contractor doesn’t actually owe any US tax, they can claim a tax refund by filing a United States tax return.
Is any non-US person?
Tax exemption of so called “independent personal services”, i.e. services by the independent contractor, is possible if the country of residence of the contractor has Tax Treaty with the United states with the related article - which exists in most tax treaties.
However, if the contractor is a tax resident of the country without the tax treaty with the US (i.e. Singapore), then the payor is required to take a 30% tax withholding from the compensation paid and issue form 1042-S reporting income received and tax withholding made.
Contractor who received 1042-S, TFX can file your 1040NR
If you are a nonresident contractor qualifying for treaty income exemption who received form 1042-S and had tax withheld, TFX can prepare your non-resident tax return to receive the refund for tax withheld.