It's no longer uncommon for U.S. companies to do business with foreign companies, freelancers or independent contractors. U.S. companies submit documents to the IRS at tax time in order to account for the monies paid to these entities. If your business is in compliance with the law, you need to know which documents are required.
Tax Withholding Rule
According to the IRS, a foreign worker is subject to U. S. laws on income earned in the country. Most types of U.S. income have a tax withholding rate of 30 percent. However, a foreign person's income may be taxed at a reduced rate, or their work may be tax-exempt, if their country of origin has an agreement with the U.S.
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Read More: Can an Individual Issue a 1099?
Do Foreign Companies Get a 1099?
Employers and individuals issue a 1099 form to each independent contractor or freelancer paid at least $600 during the year. Starting in the 2020 tax year, employers and individuals must use Form 1099-NEC to report nonemployee compensation, which includes:
- Services performed by someone who is a nonemployee.
- Cash payments for fish or other types of aquatic life purchased from someone in the business of catching fish.
- Payments made to a lawyer.
Employers give 1099-NEC forms to individuals and companies located in the US.
Read More: If I Pay a Lawyer, Do I Need to Issue Them a 1099?
Forms for Foreign Contractors
If your U.S. company employs remote workers outside of the country, issuing a 1099 form showing their earnings isn't appropriate. Instead, you would ask such an independent contractor or freelancer to complete and sign a W-8BEN form.
Foreign partnerships, limited companies and corporations doing business with U.S. customers should complete a formW-8BEN-E. The foreign entity completing the form would be located outside the U.S. and sending goods to the U.S.
Purpose of the W-8BEN Form
The W-8BEN form certifies that the independent contractor or freelancer is a resident of a foreign country and not the U.S. The person also certifies that they were paid income not subject to U.S. tax. This income is not taxable because a tax treaty exists between the contractor's or freelancer's country and the US.
If your U.S. company employs remote workers outside of the country, issuing a 1099 form showing their earnings isn't appropriate.
The person or company signing a W-8 form also certifies that they own all the monies their clients or customers paid to them. If W-8 form is not signed and forwarded to the client or customer making payments, the client or customer must withhold 30 percent in taxes. This liability is independent of the responsibility of the foreign contractor or company required to pay the tax.
Payments Made to a Third Party
The client or customer must satisfy themselves that the contractor or company is receiving the payments and that they are not going to a third party. They may request some form of identification from the contractor showing their name and address. A company can note it is paying the same company listed on the bill of sale.
Read More: How to File Taxes as a Subcontractor
Working with foreign contractors and companies does require some different paperwork. Foreign companies do not get a 1099 form, but your business can form productive relationships with foreign contractors, freelancers and companies that will benefit everyone concerned.
If you have questions or concerns about the correct tax forms to use when doing business with foreign contractors, freelancers or companies, contact the IRS.