Today more and more U.S. companies are hiring foreign contractors. This leads to questions about whether they need to withhold any tax and if any type of reporting related to these payments is required.
The answers to these questions depend on whether the foreign contractor is a U.S person and whether the services are performed in the United States.
If the foreign contractor is not a U.S. person and the services are performed wholly outside the U.S., then no reporting is required, and no withholding is required. If the foreign contractor is not a U.S. person and the services are performed in the U.S, then payments made to the foreign contractor are generally subject to withholding and reporting.
The company should obtain a completed and signed Form W-8 BEN(E) from the foreign contractor that declares the contractor’s foreign status before making any payment. The Form W-8BEN(E) is not filed with the IRS but should be kept by the company in its files.
Tax Withholding
The company is usually the party responsible for withholding any required tax when it pays a foreign contractor for services performed in the United States. The rate is generally 30% of the payment amount. In some cases, a reduced rate may apply if there is a tax treaty between the foreign contractor’s country of residence and the United States. If the company does not withhold and the foreign contractor does not satisfy its tax obligation, the company may be held liable for the tax and any associated interest and penalties.
The amount of tax the company is required to withhold determines the frequency of the deposits to be made to the IRS. The following rules show how frequently deposits should be made:
| Amount of Undeposited Tax: | Company Must Deposit Tax: |
| End of the year: less than $200 | By March 15 of the following calendar year |
| End of the month: $200 or more but less than $2,000 | Within 15 days after the end of the month |
| End of any quarter-monthly period: $2,000 or more | Within 3 business days after the end of the quarter-monthly period |
Reporting Requirements
Companies that made payments in 2019 to foreign contractors for services performed in the United States are required to file Form 1042 and 1042-S with the IRS by March 16, 2020. Also, they must furnish Form 1042-S to the foreign contractor by March 16, 2020.
Boulay is here to help you with your tax withholding and filing requirements. Contact a Boulay advisor at 952.893.9320 or learnmore@boulaygroup.com.
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