How to Pay Foreign Contractors, W-8BEN and Withholding
The US payer's guide to contractors who live abroad, built on the one rule that decides the form, the withholding and the deadline.
Ask one question before anything else, where was the contractor sitting when they did the work. If a foreign contractor worked entirely outside the United States, collect Form W-8BEN, withhold nothing and file nothing. If any of the work happened on US soil, withhold 30 percent on that share and file Form 1042-S by 15 March. If the contractor is a US citizen or green card holder living abroad, they are a US person, so collect Form W-9 and send a Form 1099-NEC once you have paid $2,000 or more.
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Three US businesses can pay the same contractor the same $8,000 and owe three different things to the IRS. The rule that splits them is where the person was sitting when they did the work. Not where your company is, not where the contract was signed, not which bank sent the money.
The IRS states it plainly. The place where the personal services are performed generally determines the source of the income, regardless of where the contract was made, the place of payment, or the residence of the payer. Everything below follows from that one line.
What you need before the first payment
Three facts settle the whole question, and you need all three before money leaves your account.
- Is the contractor a US person for tax purposes. A US citizen is a US person wherever they live. So is a green card holder, and so is anyone who meets the substantial presence test. A US person gives you a Form W-9, exactly like a contractor in Ohio, and their address in Lisbon changes nothing.
- Where was the work physically done. Ask before the invoice, not after. A developer in Warsaw who never boards a plane is one answer. The same developer who spends three weeks in your Austin office is a different answer, and a more expensive one.
- Do you have a signed Form W-8BEN. A foreign individual gives you Form W-8BEN. A foreign company gives you Form W-8BEN-E. The form goes to you and stays in your file. You never send it to the IRS.
Without a valid W-8BEN you cannot treat the payee as foreign, and backup withholding at 24 percent can apply to a reportable payment when no taxpayer identification number is on hand. Collect the form before the first invoice is due, not in January.
The three outcomes and how to tell them apart
Once you know the tax status and the place of work, the answer is fixed. There are three branches and no fourth.
| Who they are | Where the work happened | Form you collect | Do you withhold | What you file | Deadline |
|---|---|---|---|---|---|
| Foreign person | Entirely outside the US | W-8BEN or W-8BEN-E | No | Nothing | None |
| Foreign person | Partly or wholly inside the US | W-8BEN, plus Form 8233 for a treaty claim | Yes, 30 percent on the US share | Form 1042-S and Form 1042 | 15 March |
| US person abroad | Anywhere | W-9 | No | Form 1099-NEC at $2,000 or more | 31 January |
Branch one covers most small businesses. Your designer in Manila designs in Manila, the income is foreign source, and foreign source income paid to a nonresident alien is exempt from withholding under Internal Revenue Code Section 1441(a). The IRS says it is normally not required to be reported on an information return either. No 1099, no 1042-S, nothing. You keep the W-8BEN and the invoices.
Branch two is the one the rest of the internet leaves out. Compensation paid to a nonresident individual for personal services performed in the United States is withheld at 30 percent unless a treaty or another provision says otherwise. That rule applies regardless of the payer's place of residence, where the contract was made, or the place of payment. A signed W-8BEN in your drawer does not change it.
Branch three catches people out in the other direction. A US citizen freelancing from Bali is still a US person, still gives you a W-9, and still gets a Form 1099-NEC once you have paid at least $2,000 in the year.
The 1099 threshold moved to $2,000
For tax years beginning after 2025 the reporting threshold for Forms 1099-NEC and 1099-MISC rose from $600 to $2,000, and the IRS says it may be adjusted for inflation from calendar year 2027. Most pages on this subject still print $600. The 2026 instructions say to file Form 1099-NEC for each person you have paid at least $2,000 in the year.
Step-by-Step Process
- 1
Establish tax status in writing
Send Form W-9 to anyone you believe is a US person and Form W-8BEN to anyone you believe is not. Let the form answer the question rather than the mailing address. Keep the signed copy.
A W-8BEN stays valid from the date it is signed to the last day of the third calendar year after that, so one signed in September 2026 runs to 31 December 2029.
Tips
- Ask for the form at contract signing, when the contractor still wants something from you.
- A foreign company signs W-8BEN-E, not W-8BEN. Sending the wrong one costs you a week.
Common Mistakes
- Deciding status from the billing address instead of from the form.
- Letting the first payment go out on a promise that the form is coming.
- 2
Ask where the work will be done, and write the answer down
Put it in the contract. A single line saying all services are performed outside the United States costs nothing and is the record you will want if anyone asks.
If travel to the US is possible, add a clause requiring the contractor to tell you the dates before they travel.
Free At contract stage Your contractor agreementTips
- A conference trip counts. So does a week working from a relative's house in Florida.
Common Mistakes
- Assuming a foreign address means foreign work.
- Finding out about US travel after the year has closed.
- 3
Split the pay if the work was split
When one engagement covers work inside and outside the country, the IRS allocates on a time basis. Multiply total pay by days of service performed in the US, then divide by total days of service the pay covers.
The IRS worked example uses a hockey player paid $150,000 for 242 days, 194 of them in the US, which gives $120,248 of US source income.
Tips
- Count days of service, not calendar days. Idle days the pay does not cover are not service days.
Common Mistakes
- Allocating by invoice value instead of by days.
- Treating a partly US engagement as entirely foreign because most of it was remote.
- 4
Withhold on the US share before you pay
Withholding comes off the gross. You cannot reduce the amount by expenses or deductions first.
If your contractor is claiming a treaty exemption on personal services income, the form for that is Form 8233, not the W-8BEN. Collect it before you release the payment, because once the money is gone the tax is yours.
Tips
- Tell the contractor the gross and the net in the same message. Nobody enjoys this surprise.
- A treaty claim with no Form 8233 in hand at payment time is not a claim you can rely on.
Common Mistakes
- Withholding on the net after expenses.
- Accepting a W-8BEN as the treaty claim for personal services income.
- 5
Deposit what you withheld
Chapter 3 withholding is deposited with the IRS rather than held until filing season. Your deposit schedule depends on how much you accumulate, and the Form 1042 instructions carry the thresholds.
A late deposit is a separate penalty from a late form, so the two deadlines are worth tracking apart.
Tips
- Move the withheld money to a separate account the day you hold it back. It is not yours.
Common Mistakes
- Holding withheld tax in the operating account until March.
- 6
File in January or March, depending on the branch
Branch three files Form 1099-NEC by 31 January. Branch two files Form 1042-S with the IRS and furnishes it to the contractor by 15 March.
If you file a 1042-S you must also file Form 1042 for the year. Branch one files neither form.
Tips
- The 1042-S goes to the contractor as well as the IRS, and both copies are due on the same day.
Common Mistakes
- Sending a Form 1099-NEC to a nonresident alien. The IRS instructions send you to Form 1042-S instead.
- Filing the 1042-S and forgetting the Form 1042 that goes with it.
- 7
Keep the file for each contractor
One folder per person holding the signed W-8BEN or W-9, the contract with its place of performance clause, every invoice, and the payment records.
If the contractor travelled to the US, keep the dates. This is the evidence that decides which branch you were in.
Free Ongoing Your own recordsTips
- Diary the W-8BEN expiry when you file it, not when it lapses.
Common Mistakes
- Keeping the invoices and losing the tax forms.
What getting it wrong costs
The exposure here is the tax itself rather than a filing penalty. The IRS is direct about this. As a withholding agent you are personally liable for any tax required to be withheld, and that liability is independent of the tax liability of the foreign person you paid. If you fail to withhold and the contractor does not settle their own US tax, both of you are liable for the tax, the interest and the penalties.
Even where the contractor pays in full, the IRS says you may still be held liable for interest and penalties for the failure to withhold. On a $50,000 engagement performed in the US, the 30 percent you did not take off is $15,000 the agency can look to you for.
There is a second cost that nobody sends a bill for. Contractors who discover mid engagement that 30 percent is coming off tend to reopen the rate, and a payer who never raised it has a bad conversation ahead. Settling the question in the contract avoids it.
After the first payment
The admin is light once the file is set up, and it is mostly a calendar.
- Diary the W-8BEN expiry, the last day of the third calendar year after signing.
- Ask for a fresh form if the contractor moves country, changes entity, or becomes a US person.
- The contractor must tell you within 30 days if anything on their W-8BEN stops being correct.
- Re-read the place of performance answer each year. Remote work moves.
- Mark 31 January and 15 March in the calendar you use for the rest of your filings.
If you already run payroll through a provider, the same platform usually collects W-9 and W-8 forms and files the year end returns for the people it pays. Our best payroll services comparison covers who does what, and how to do payroll covers the domestic side. Cross border payment rails are a separate category. Founders commonly use Wise, Payoneer or Deel to move the money, and none of them is on our tested list, so we name them without pointing you at one.
The Complete Checklist
- Send Form W-9 or Form W-8BEN before the first invoice01
Let the signed form decide tax status, not the mailing address.
At contract signingFree - Write the place of performance into the contract02
One line saying where services are performed, plus a duty to report US travel.
At contract signingFree - Confirm whether any work happens on US soil03
This single answer decides the withholding and the form you file.
Before each payment runFree - Collect Form 8233 for any treaty claim on personal services04
The W-8BEN does not claim a treaty exemption on personal services income.
Before paymentFree - Withhold 30 percent on the US source share05
Calculated on the gross, with no reduction for expenses.
At payment30 percent of the US share - Deposit withheld tax on your schedule06
Chapter 3 withholding is deposited during the year, not at filing.
Per deposit scheduleFree - File Form 1099-NEC for US persons by 31 January07
Applies once you have paid a US person $2,000 or more in the year.
31 JanuaryFree - File Form 1042-S and Form 1042 by 15 March08
Required whenever you paid US source income to a foreign person.
15 MarchFree - Diary the W-8BEN expiry date09
Valid to the last day of the third calendar year after signing.
Set on day oneFree - Keep forms, contract, invoices and travel dates together10
This file is the evidence for which branch you were in.
OngoingFree
Common mistakes
Four wrong answers circulate widely on this topic, including in Google's own AI summary of it. Each one has a specific correction.
The first is that you never file anything for a foreign contractor. That is wrong for branch two. Work performed on US soil produces US source income and a Form 1042-S, whatever the contractor's passport says.
The second is that a W-8BEN removes the withholding. It does not. The form establishes that the payee is foreign. Where the work happened decides whether there is tax to withhold, and the two questions are separate.
The third is that the contractor files the W-8BEN with the IRS. They do not. The form is given to the withholding agent or payer, which is you, and you retain it.
The fourth is that a US citizen living abroad gets a W-8BEN. They do not. They are a US person, they complete a Form W-9, and they receive a Form 1099-NEC at $2,000 or more.
Frequently Asked Questions
Yes, and no special permission is needed. What changes is the paperwork. Collect Form W-8BEN from a foreign individual or Form W-8BEN-E from a foreign company, then decide the tax question by asking where the work was physically performed. Work done entirely outside the United States generally produces no withholding and no information return. Work done inside the country is withheld at 30 percent and reported on Form 1042-S.
Only if the contractor is a US person, and that is about tax status rather than location. A US citizen or green card holder working from Berlin completes Form W-9 and gets a Form 1099-NEC once you have paid $2,000 or more. A foreign national completes Form W-8BEN instead. If you are unsure, send the W-9 and let the contractor tell you they cannot sign it.
It depends on where the work happened. Foreign source income paid to a nonresident is exempt from withholding under Section 1441(a) and normally needs no information return, so there is nothing to file. US source income goes on Form 1042-S, filed with the IRS and furnished to the contractor by 15 March, and you file a Form 1042 for the year as well. Never use Form 1099-NEC for a nonresident alien.
Split the payment. The IRS allocates personal service income on a time basis, so you multiply total pay by the days of service performed in the United States and divide by the total days the pay covers. Withhold 30 percent on the US share only. The remainder stays foreign source. Keep the travel dates, because the allocation is only as good as the record behind it.
Generally from the date it is signed to the last day of the third succeeding calendar year. A form signed on 30 September 2026 runs through 31 December 2029. It expires sooner if a change in circumstances makes any information on it wrong, and the contractor has 30 days to tell you and send a replacement. Diary the expiry date when you file the form.
Not always, but the exemption is not automatic and the W-8BEN is not the form that claims it. For compensation for independent personal services, the contractor claims a treaty exemption on Form 8233. Collect it before you pay. Without a valid claim in hand at payment time, withhold at 30 percent on the US share, because the liability for getting this wrong sits with you.
Sources & References
- IRS, Source of income, Personal service income
- IRS, Pay for personal services performed
- IRS, Foreign source income, Form 1042-S reporting not required
- IRS, Withholding agent
- IRS, About Form W-8 BEN
- IRS, Instructions for Form W-8BEN
- IRS, About Form 8233
- IRS, Instructions for Forms 1099-MISC and 1099-NEC
- IRS, Instructions for Form 1042-S
- IRS, About Form 1042
- IRS, General Instructions for Certain Information Returns
About the Author
Legal & Compliance Analyst
Daniel grew up in the shadow of Silicon Valley but chose the legal route over engineering, working as a paralegal for a corporate law firm specializing in mergers and acquisitions. He realized that early-stage founders were constantly making catastrophic legal mistakes because they couldn't afford a $500/hour attorney, prompting his move to B2B media.
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