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Does My Business need to Issue a 1042S for Payments to Foreign Individuals Outside the U.S.?

November 13, 2012

When is it necessary to file a Form 1042/1042S?

As you begin to think about your taxes for this year, don’t forget about reporting payments made to foreign individuals for services performed entirely outside of the U.S.

Our International Tax Group receives many questions regarding foreign contractors and how to report their payments. As long as the foreign individual is performing all of the services outside of the U.S., there is no 1099 or withholding requirement for the domestic employer. However, if a reporting requirement exists, a 1042S should be issued to the foreign individual and the US payor needs to file the form 1042 with the IRS.

If you are unsure if your contractor is a U.S. person, or if you think your foreign contractor is performing services within the U.S., we suggest you ask. The general rule of thumb is to always ask the foreign contractor to complete a valid Form W-8BEN. This form allows them to certify that they are not a U.S. person and whether or not a withholding is required or if the individual is applying a treaty rate. Although this form is not a required to be filed with the IRS, this is crucial documentation in case there is ever an audit performed.

If you are worried that your contractor is performing services within the U.S. you can ask them to sign a statement confirming that none of the services provided were in the U.S. This statement can simply be attached to the Form W-8BEN mentioned above.

If you must fulfill the reporting requirement and have questions regarding Form 1042 and 1042S or would like assistance recording your contractors Foreign Service requirements with a Form W-8BEN, please contact any member of our International Tax team. Read our latest article for more information on “How to Report Domestic U.S. Business Payments made to Foreign Individuals for Services Performed Entirely outside the U.S.”.

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