Do You Issue a 1099 to Foreign Contractors? A Complete Tax Compliance Guide

Your company is growing, and your team is powered by the best talent from around the world. Then tax season rolls around. You’re looking at a payment report for a developer in Brazil, and the question hits: Are you supposed to send them a 1099 form?

This confusion is one of the biggest risks in managing a global workforce. With IRS penalties for intentionally disregarding the filing of correct information returns potentially exceeding $600 per form, with no upper limit, getting this right is a C-level concern.

This guide will break down exactly why you don’t issue a 1099 form to foreign contractors, explain the correct forms and procedures you must follow instead, and show you how to build a compliant process that scales.

Do Foreign Contractors Get a 1099? 

No, foreign contractors do not get a 1099. You do not issue a Form 1099-NEC or a 1099-MISC to a foreign contractor for services they perform entirely outside of the United States. This is one of the most common points of confusion in tax compliance, and getting it wrong can lead to compliance and operational issues, ranging from Internal Revenue Service (IRS) penalties to a complicated year-end cleanup project for your team.

Why a 1099 Doesn’t Apply

It ultimately comes down to a core tax principle known as the source of income. The purpose of Form 1099-NEC is to report payments for non-employee compensation that are part of the U.S. tax system. Income earned by a non-U.S. person for work they do in their home country is generally considered “foreign source income,” and the IRS doesn’t require a 1099 for any given tax year.

Who Actually Gets a 1099?

A 1099 is required only for individuals the IRS refers to as “U.S. person.” This includes U.S. citizens, Green Card holders, and U.S. resident aliens. If you hire an American citizen who lives in London, you absolutely issue them a Form 1099-NEC (not to be confused with a Form 1099-MISC, which is for things like rent or royalties), and that specific taxpayer is responsible for their U.S. tax obligations.

Why W-8BEN (or W-8BEN-E) Replaces Form 1099 for Non-U.S. Contractors

So if you don’t send a 1099, what do you do instead? The answer lies in a different set of IRS tax documents that serve a completely different purpose. Instead of reporting their income, your goal is to formally document their status as a non-U.S. person, and that’s where the Form W-8 comes in.

The Real Purpose of a W-8 Form

Think of the Form W-8 not as a tax reporting document, but as a certificate of foreign status that identifies the beneficial owner of the income. When a self-employed contractor fills out this form, they are making a formal declaration to you, under penalties of perjury, that they are not a U.S. person.

This is your legal proof to the IRS, justifying why you correctly avoided the default tax withholding on their income and did not issue a 1099.

Choosing the Right Form — W-8BEN vs. W-8BEN-E

The W-8 comes in several variations, but you will almost always have your payees use form W-8BEN or W-8BEN-E. The Form W-8BEN is for individuals—your freelancer writers and developers. The Form W-8BEN-E is for business entities, such as the foreign entities you’ve hired as creative agencies.

When a W-8 Form Becomes Invalid

Here is a crucial detail that many businesses miss—a W-8 form is not valid forever. It expires after three years, but more importantly, it becomes invalid the moment a situation changes. 

If your contractor’s country of residence changes and they move to the U.S., their W-8 is instantly invalid. At that point, they need to complete form W-9, and all subsequent payments fall under 1099 rules, making them responsible for U.S. income tax.

IRS Reporting Requirements: What Forms Are Required Instead of 1099

While you don’t need a 1099 for a foreign contractor working abroad, that doesn’t mean you have no reporting obligations. The IRS remains particularly interested in certain payments made to foreign persons, especially those with a connection to the United States. This is where the Form 1042-S comes into play.

Introducing Form 1042-S

Consider the Form 1042-S as the appropriate reporting tool for specific situations. While a 1099 is off the table, the IRS requires you to report certain types of payments on this form. Generating and filing these different forms for various payees has traditionally been a fragmented process; however, modern integrations are now simplifying this process.

The Trigger — When Work is Done in the U.S.

So what triggers the need for a 1042-S? The key concept is “Effectively Connected Income” (ECI). This is a technical term for the income a foreign person earns from services they perform while physically inside the United States.

If your UK-based consultant flies to your New York office for a one-week project, the payment for that specific week is considered ECI.

The 30% Withholding Rule

When you make a payment that qualifies as ECI, you are generally required by the IRS to withhold a flat 30% tax from that payment. This is a non-negotiable default rule. That means if you owe the contractor $10,000, you would pay them $7,000 and remit the remaining $3,000 to the IRS.

Reducing Withholding with Tax Treaties (Form 8233)

There is a way to reduce or eliminate this 30% withholding with a tax treaty. To claim this benefit, the contractor must give you a valid Form 8233. Critically, you (the payer) must then sign and submit this form to the IRS within a tight deadline, making it a time-sensitive filing requirement that many businesses miss.

Avoid These Common Mistakes When Paying Foreign Contractors

Navigating the rules for paying foreign independent contractors is full of potential pitfalls. Even with the best intentions, a simple process error can lead to significant compliance headaches with the IRS. Here are some of the most common and costly mistakes finance leaders make.

Managing AP and Mass Payments: The Tax Compliance Challenge

For many fast-growing digital businesses, the tax compliance challenge is actually two problems in one. Your company likely has two distinct and parallel payment streams, each with its own workflow but sharing the same set of IRS rules.

The First Stream — Traditional Accounts Payable

On one side, you have your traditional invoice-backed AP. These are your corporate vendors, like the software company you pay for your CRM, the law firm on retainer and the lease for your office space. This process is relatively low volume and driven by formal invoices.

The Second Stream — High-Volume Mass Payments

On the other side, you have your mass payments. These are the high-volume payouts to your global network of contractors, creators or affiliates. The process here is not driven by individual invoices but by performance data, and the sheer volume of payees can range from hundreds to tens of thousands.

The Risk of Disjointed Systems

Here is the critical challenge: the IRS tax compliance rules apply to both streams. You need to collect a W-9 and file a 1099 for your U.S. vendors and your U.S. creators. 

You need a W-8 from your foreign law firm and your thousands of international affiliates. When these two workflows are managed in separate systems, you create data silos and operational chaos.

How Tipalti Simplifies W-8 Collection and IRS Reporting for AP and Mass Payments

The only way to solve the hybrid compliance challenge is with a single unified platform that can manage the tax requirements for both your traditional AP and your high-volume mass payments. 

Tipalti is designed to do exactly that, transforming a fragmented high-risk process into a streamlined and automated workflow. It provides one system of record for tax compliance across your entire payables operation.

Automating Tax Compliance at Scale for Mass Payments

For businesses managing a large network of global payees, manually collecting and validating thousands of tax forms is a non-starter. PubMatic, a leading AdTech company, faced this challenge as its publisher network grew.

The platform’s self-service portal guides every payee through a digital KPMG-certified process. It asks a series of simple questions to determine their status, then presents them with the correct tax form, whether it’s a W-9, a W-8BEN, or another variant. 

Unifying Compliance for Your AP Workflow

That same powerful tax engine can then be applied to your traditional invoice-backed AP workflow, creating a consistent process for all your payees, whether they are a freelance creator or a major corporate vendor. Before Tipalti, Stack Overflow’s finance team was wrestling with a disjointed manual process that couldn’t support their global growth.

As Assistant Controller Brad Clifford noted, they needed a “multicurrency, multi-entity technology” that could be rolled out across the entire organization. By implementing Tipalti and leveraging its robust integration with their ERP, Sage Intacct, they were able to centralize their AP operations.

The result was a dramatic transformation. Clifford confirmed they “removed 90% of the manual elements from the process” and “saved five days on the accounting close process,” a metric that speaks directly to the efficiency gains felt by the entire finance team.

Streamlining Year-End Filing with Tipalti’s New Zenwork Integration

To solve the final, painful step of year-end reporting, Tipalti now integrates directly with Zenwork, a leading tax information reporting solution. This allows you to e-file both your Form 1099s and your Form 1042-S forms directly from the Tipalti platform.

Final Checklist: Paying Foreign Independent Contractors the Right Way

Navigating U.S. tax compliance for a global workforce becomes manageable when you break it down into a clear checklist. Use these steps as a final guide to ensure your process is sound and ready for your next audit.

• Verify Status First: Before you do anything else, confirm whether your contractor is a U.S. person or a non-U.S. person. This single factor dictates the entire workflow.
• Collect the Right Form (Before You Pay): Make it a strict policy to collect a valid tax form before the first payment goes out. Get a Form W-9 for your U.S. contractors and a Form W-8BEN or W-8BEN-E for your foreign contractors.
• Track Form Validity: Remember that a W-8 form is not a one-and-done document. Implement a system to track its three-year expiration date and to act on any change in circumstances.
• Assess the Location of Service: Don’t just assume all work is a foreign source. If a contractor performs any services while physically in the U.S., you need to identify that income.
• Report on the Correct Form: At year-end, prepare to file Form 1099-NEC for your U.S. payees and Form 1042-S for any foreign payees with U.S. source income.
• Simplify Filing with an Integrated Solution: Use an integrated solution, such as Tipalti’s Zenwork integration, which enables you to file both 1099 and 1042-S forms from a single system.

Automate Global Tax Compliance With Tipalti

The question of whether to issue a 1099 to a foreign contractor is a window into the broader challenge of managing global tax compliance. Getting this wrong is a real financial risk. The rules are complex, the stakes are high, and manual processes almost guarantee that something will eventually slip through the cracks.

An automated approach is the only way to turn this recurring challenge into a solved problem. By centralizing tax form collection and unifying your year-end reporting for both 1099s and 1042-S forms, you move from a position of uncertainty to one of control. This frees up your finance team to focus on strategy, not spreadsheets, and gives you the confidence to scale your global team without scaling your compliance risk.

Download the Scalable Global Payouts ebook to learn how to streamline international contractor payments and reduce compliance risk, from onboarding through year-end reporting.