Paying foreign vendors: Forms W-8BEN, W-8BEN-E, 1042, and 1042-S

A foreign person is not asked for a Form W-9. Payments of certain U.S.-source income to foreign persons, such as royalties, interest, and some services performed in the U.S., generally carry a 30 percent withholding obligation unless a treaty or exception reduces it. The business paying is responsible for withholding and reporting.

Payment for services performed entirely outside the United States by a foreign person is generally not U.S.-source income, so withholding usually does not apply. Payment for services performed in the U.S. is. The classification depends on the facts, so keep a record of where the work was done and ask a professional if it is unclear.

Before you pay, ask the vendor for a Form W-8BEN if they are an individual or a Form W-8BEN-E if they are an entity. The form states the payee's country, claims any treaty benefit, and certifies they are not a U.S. person. Check it is complete and signed. It is generally valid for a number of years unless circumstances change.

Without a valid form, the default is to withhold at the full rate.

Payments subject to this regime are reported on Form 1042-S, one per payee, and summarized on Form 1042. The filing deadline is generally March 15 after the year. Deposits of the tax withheld follow their own schedule. Payments that are not U.S.-source are not reported this way, but you should keep the evidence supporting that conclusion.

Keep each vendor's W-8 form, the contract, invoices, proof of where the services were performed, payment records, and the filed returns. If the IRS asks why you did not withhold, those documents are the answer.

A U.S. company pays a freelance designer in another country $5,000 for work done entirely in that country. The income is generally not U.S.-source, so withholding does not apply. The company still collects a Form W-8BEN, saves it with the invoice, and notes where the work was performed. If the IRS asks why nothing was withheld, that file is the answer.

Now the same company pays a consultant from another country $5,000 for a week of work done on site in the United States. That income is U.S.-source. Without a valid form, the default withholding of 30 percent applies, which is $1,500. A tax treaty may reduce or remove it, but only if the consultant claims the benefit properly on a valid form before the payment is made.