Form 1099 for Foreign Contractors: The Need to Knows

In the United States, tax regulations and requirements for expat business owners or freelancers living abroad can be complex. To remain fully compliant, you’ll need a tax document known as Form 1099 for foreign contractors to report any payments you’ve made.

With more and more businesses relying on a global workforce to support their operations, Form 1099 for foreign contractors is becoming increasingly commonplace. To help you with any challenges you may have, we’ve put together some useful guidance about Form 1099 for contractors and the reporting process you’ll need to follow, and explain why it’s essential to get this right to avoid penalties and fines.

What is Form 1099 for foreign contractors and how does it work?

Form 1099 is specific to the United States tax system and is used by businesses and organizations to report income paid to foreign contractors or entities for services they’ve provided, or income earned during the tax year.

How does this work in practice for businesses that use foreign or independent contractors?

You’ll send a copy of Form 1099 to the contractor which you have already filled out. The contractor will then use the form to report the income they received as a self-employed worker on their personal tax return.

Businesses and organizations are required to issue Form 1099 to an independent contractor   if they’ve paid them $600 or more in a single year, and one of the following applies:

• The independent contractor is a ‘U.S. person’ as defined by the Internal Revenue Service (IRS).
• The independent contractor is not a ‘U.S.’ person’ but provides services to businesses within the U.S.

Businesses and organizations are not required to issue Form 1099 where the foreign or independent contractor is not a U.S. person and conducted their services entirely outside U.S. borders. Instead, the foreign contractor must complete and file Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for US Tax Withholding and Reporting).

What are the different versions of Form 1099 for foreign contractors?

There are several versions of Form 1099 for foreign contractors and each one is designed for different types of income. For the purpose of reporting payments made to foreign or independent contractors, a business will need Form 1099-NEC (Non-Employee Compensation), which is what people generally mean by Form 1099.

In this case, the terms ‘foreign contractor,’ and ‘independent contractor’ relate to self-employed contractors who work or provide services to other clients, but strictly are not employees. Sometimes this group of workers is also referred to as 1099 contractors, freelancers, or similar.

To complete Form 1099-NEC, a business must provide important information like the contractor’s name, address, social security number or Employee Identification Number (EIN). These details are easily obtained by sending the contractor Form W-9 which they fill in and return to their payer.

Meanwhile, businesses and organizations may also be required to file Form 1099-MISC when payments totaling $600 or more are made to foreign contractors within a single year. Here, the contractor must not be a U.S. citizen but has worked or provided services within the country. Form 1099-MISC is typically used to report miscellaneous income such as rent payments, medical contributions, royalties, prizes, and rewards.

It is vital that businesses understand their tax-reporting obligations, and that if you hire a U.S. citizen living abroad, you are legally required to issue a Form 1099-NEC and/or 1099-MISC.

Keeping on top of rules and regulations around Form 1099 and tax reporting can be a challenge for many businesses, especially given the financial penalties that can be dished out for incorrect or late reporting which are set out below. Therefore, many businesses and organizations prefer to outsource their payroll function to a trusted and established provider so they remain compliant and fulfill their tax reporting duties relating to independent contractors who are international.

Does Form 1099 for foreign contractors apply to US contractors abroad?

No, U.S. contractors living abroad are not required to file Form 1099. They may still receive a completed Form 1099 from clients that paid them $600 or more over the year. The contractor will then use this information to report their global income when filing their U.S. tax return.

It is important to note that foreign businesses or clients may not be legally required to send contractors Form 1099 according to the specific regulations in that country. Here, the contractor is wholly responsible for providing their full income details when accurately reporting their U.S. taxes.

U.S. citizens living abroad may be also entitled to numerous expat tax benefits from the IRS such as the Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit, and Foreign Housing Deduction, all of which can help reduce what is owed in U.S. taxes and sometimes deliver significant tax savings.

What Form 1099 deadlines and penalties do I need to know?

Anyone required to file Form 1099 will, in most circumstances, have to send it to both the foreign contractor and the IRS by January 31 every year. There are severe penalties for those who fail to file Form 1099 before a deadline. These include:

• $50 for each late form filed within 30 days of the deadline passing. The maximum penalty for this is $588,500, or $206,000 for small businesses.
• $110 for each late form filed more than 30 days after the deadline but before August 01. Here, the maximum penalty is $1,766,000, or $588,500 for small businesses.
• $280 for each form filed later than August 1. The maximum penalty is $3,532,500, or $1,177,500 for small businesses.

In this context, the U.S. Government’s Social Security Administration defines a ‘small business’ as any business that has generated $5 million or less in average revenue for the last three tax years.

The penalties listed above will only be enforced when failure to file Form 1099 occurs unintentionally. Any business or organization that intentionally refuses to file will be fined $570 per form, with no set maximum penalty.

Does your business require guidance around 1099 for foreign contractors?

At IRIS FMP, our comprehensive global payroll solutions enable businesses to reduce errors, save time, and remain compliant with regulations around Form 1099 for foreign contractors. Can we help your organization? Contact us today.