REPORTING U.S. BUSINESS PAYMENTS TO FOREIGN INDIVIDUALS OR COMPANIES FOR SERVICES PERFORMED OUTSIDE THE U.S.

The world we live in is global, and as a result every business and person is linked in some manner to international business activities.  Especially Real Estate agents or property managers that pay referral fees to out of country brokerages – are there reporting requirements that you need to consider?

One common question received is how a domestic U.S. business should treat payments made to a foreign service provider for services performed entirely outside of the U.S.  Are there any reporting requirements?  What forms are required to be filed?  Is the U.S. entity required to withhold tax on the payments?

The Simple answer is this: if the foreign service provider is performing all of the services outside of the U.S., there is no 1099 or withholding requirement for the domestic U.S. payor. On the other hand, if the foreign service provider performs any of its service in the US, then the US payor is required to issue a Form 1042S to the foreign service provider reporting the gross payment and any amounts withheld for US tax purposes.  In most cases you will have to withhold a 30% tax deposit on the gross payment and submit to the IRS via EFTPS.  The exception would be if the foreign service provider gives you a valid W-8BEN or W-8ECI as an exemption from withholding.

How do you know if the contractor you are using is not a U.S. person?  How can you be sure that they are not a U.S. citizen working outside of the U.S.?  The easiest way to be sure is to ask the contractor to complete a valid Form W-8BEN which allows them to certify that they are not a U.S. person and whether a withholding requirement exists under the applicable tax treaty. Form W-8BEN is not required to be filed with the IRS but is required to be kept by the U.S. payor to support the foreign contractor’s representation of their residency and whether withholding was required. Note this documentation is crucial to have in case your company is audited by IRS.

For record keeping, it is best to have the foreign contractor sign a statement confirming that none of the services provided were provided in the U.S.  This statement can be attached to the Form W-8BENfw8ben RVSD 10.2021