When to Issue a 1099 for Non-U.S. Citizens

Businesses often face uncertainty when compensating non-U.S. citizens for services, as the familiar process of issuing a Form 1099 may not apply. Determining the correct tax reporting procedure requires understanding how U.S. tax law classifies these individuals for reporting purposes. This determination dictates which forms to use and whether tax withholding is necessary. Making the wrong choice can lead to compliance issues and penalties.

Determining the Worker’s U.S. Tax Status

The first step for a business is to determine the worker’s tax status in the United States. For federal tax purposes, a non-U.S. citizen is classified as either a “resident alien” or a “nonresident alien.” This classification is not based on their immigration status but on specific tax rules. A resident alien is treated the same as a U.S. citizen for tax reporting, and payments for their services are reported on a Form 1099-NEC if they exceed the $600 threshold in a year.

To establish if an individual is a resident alien, two tests are applied. The first is the “Green Card Test.” If a person holds a lawful permanent resident card, or green card, at any time during the calendar year, they are considered a resident alien for U.S. tax purposes.

A more complex measure is the “Substantial Presence Test,” which treats an individual as a resident alien if they have been physically present in the U.S. for a sufficient period. The test is met if the person was in the U.S. for at least 31 days during the current year and a total of 183 days during a three-year period. The 183-day total is calculated by adding all days present in the current year, one-third of the days from the first preceding year, and one-sixth of the days from the second preceding year.

Certain individuals, such as foreign government-related personnel, teachers, trainees, and students temporarily present in the U.S., are considered “exempt individuals,” and their days of presence do not count toward this test. If a worker meets neither the Green Card Test nor the Substantial Presence Test, they are classified as a nonresident alien for tax purposes.

Required Documentation from the Payee

Once the worker’s likely tax status is understood, the business must collect the correct certification form. This documentation is the payee’s formal declaration of their status and dictates the subsequent reporting and withholding actions the business must take.

For individuals classified as resident aliens, the business must request a completed Form W-9, Request for Taxpayer Identification Number and Certification. By signing this form, the individual certifies they are a U.S. person for tax purposes. The Form W-9 provides the business with the worker’s Taxpayer Identification Number (TIN), which could be a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN).

If the worker is a nonresident alien, the business must request a Form W-8. The most common version for an individual service provider is Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). For foreign entities, the correct form is Form W-8BEN-E. Payers can direct workers to the IRS website to obtain the latest versions of these forms.

These forms certify the person’s foreign status, establish that they are the beneficial owner of the income, and allow them to claim tax treaty benefits. A properly completed Form W-8BEN allows a business to reduce or eliminate tax withholding on payments based on a tax treaty. Without a valid W-8 form on file, a business must withhold tax at the maximum rate.

Reporting Payments to Nonresident Aliens

When a worker has been identified as a nonresident alien through a completed Form W-8, the payment reporting process differs from that for U.S. persons. Instead of a Form 1099, payments for services performed within the U.S. are reported on Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. This form is designed to report income and any corresponding tax withholding for foreign persons to the IRS.

Payments made to nonresident aliens for services performed in the U.S. are subject to a federal income tax withholding requirement. The default statutory rate is a flat 30% of the gross payment. This tax must be withheld by the payer at the time of payment and remitted to the IRS. The responsibility for withholding the correct amount rests with the U.S. payer.

The withholding obligation can be altered by a tax treaty. If the nonresident alien’s country of residence has a tax treaty with the U.S., they may be eligible for a reduced rate of, or complete exemption from, this 30% withholding. The payer uses the information on the Form W-8BEN to apply the correct withholding rate.

Form 1042-S is used to report various types of U.S. source income paid to foreign persons. This includes payments for independent personal services, which is the most common category for freelance contractors. It also covers other income types such as royalties, rents, scholarships, and fellowship grants. Each type of income has a specific code that must be entered on the form to identify the nature of the payment.

Filing and Submission Procedures

After preparing the correct reporting form, the final step is to submit the information to the IRS and the recipient. For payments to nonresident aliens, all individual Forms 1042-S are transmitted to the IRS along with a summary document, Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. This summary form reconciles the total amounts reported on all Forms 1042-S with the total tax liability and deposits made by the payer.

The deadlines for this process are uniform. A copy of Form 1042-S must be furnished to the recipient by March 15 of the year following the payment. All Forms 1042-S, along with the summary Form 1042, must be filed with the IRS by the same March 15 deadline. This gives businesses a coordinated timeline for fulfilling their obligations to both the payee and the tax authorities.

Businesses have options for submitting these forms. While paper filing is an option, the IRS requires electronic filing for businesses that submit many information returns. The IRS provides the Information Returns Intake System (IRIS), an online portal for submitting forms like the 1042-S. The summary Form 1042 can also be filed electronically.