Need to Report Nonresident Payments? Choose Between 1099 and 1042-S

Paying a nonresident and not sure whether to file a 1099 or 1042-S? It depends on two things: who you paid and where the work was done. If you paid a U.S. person $2,000 or more in 2026, file a 1099-NEC by February 1, 2027. If you paid a foreign person for work done in the U.S., file a 1042-S by March 15, 2027. If a foreign contractor did all the work outside the U.S., you generally do not need to file either form; instead, keep a signed W-8BEN on file. Their mailing address does not decide it.

Determining whether to file a 1099 or a 1042-S can be confusing when a U.S. person performs services outside the U.S. or a foreign person performs services within the U.S. A foreign person usually provides a W-8BEN or W-8ECI.

Should You File a 1099 or 1042-S?

Two questions determine the form: whether the payee is a U.S. person or a foreign person, and where the work was performed. A U.S. person, including a citizen, green card holder, or U.S. entity, remains a U.S. person even when living abroad. For a foreign person, work performed in the U.S. is U.S.-source income, while work performed entirely outside the U.S. generally requires no filing.

When a 1099-NEC Applies

Generally, a U.S. person includes a person who resides in the U.S. or a U.S. entity. You should issue a 1099-NEC if a person has received $2,000 or more in payments during the year. Until further notice, you should issue a 1099 to a U.S. person who resides outside the U.S. A U.S. person who performs services outside the U.S. is still considered a U.S. person.

When a 1042-S Applies

Generally, if income is effectively connected with a trade or business within the U.S., you would issue a 1042-S to a foreign person.

1099 vs 1042-S at a Glance

Why Does Work Location Change the Answer?

Your LLC pays a developer in Bangalore $8,000 throughout the year. All the work is done in India. You do not withhold or file a 1099 or 1042-S on that money since it is considered foreign-source income. Keep the contractor’s signed W-8BEN on file.

However, if the same developer works in the U.S., you must withhold taxes. Let’s say the developer works in Bangalore for a year, then takes a short trip to Austin to work for three weeks. In that scenario, $3,000 of the yearly fee is considered U.S. source income. You would have to withhold taxes on that income and report it on a 1042-S. Some treaties state that a visit of less than a certain number of days is exempt. To claim that exemption, you would have to submit Form 8233.

The best solution to this problem is to ask contract workers to break up their invoices to show what work was done in the U.S. and what work was done internationally. If contract workers send you one lump sum, you can’t determine what work was done in the U.S.

What Should You Collect Before the First Payment?

Collect the tax form before you send money, not after.

• Form W-9 for U.S. persons.
• Form W-8BEN for foreign individuals.
• Form W-8BEN-E for foreign entities.
• Form 8233 is used when a foreign individual claims a treaty exemption for personal services performed in the U.S.

A W-8BEN is generally valid for three years. A form collected late does not fix payments already made. If you paid a foreign person $10,000 in U.S.-source income without documentation, you owe the $3,000 withholding yourself out of pocket.

Also remember that it is a W-8 document status only. It does not answer the sourcing question. Your invoices do. If your LLC does not have its own tax ID yet, get an EIN online before you pay anyone. You need it to file 1099s and to file Form 1042.

What Does It Cost to Get This Wrong?

The deadlines are tight, and the penalties are per form. The figures below are as of September 2026 for payments made in 2026.

How Do You File Step by Step?

1. Start by organizing payees by tax status. Sort them into U.S. persons and foreign persons. A U.S. person who performs services outside the U.S. is still considered a U.S. person.
2. Obtain the W-9 form from U.S. vendors and a W-8 form (W-8BEN or W-8BEN-E) from foreign vendors prior to making payment. Make sure the name on the form matches the name on the vendor invoice and the name on the vendor bank account.
3. Obtain a statement from your vendor indicating where the work was performed, or keep a copy of a vendor invoice listing whether the work was performed in the United States or outside the United States.
4. Withhold and remit to the IRS a 30% withholding tax from all U.S. source payments. Neglecting to withhold and remit to the IRS a 30% withholding tax from U.S. source payments may still subject you to personal liability for the tax.
5. 1099-NECs must be issued to U.S. persons, including resident aliens, if the vendor’s annual payment total is $2,000 or more. Resident aliens include green card holders. Payments to nonresident aliens are reported on a 1042-S instead.
6. If a foreign contractor who is a nonresident alien is in the U.S. for a period of time, including Miami, and provides services to your business, a 1099-NEC is not required to be issued. Report the payments on a 1042-S. Issuing a 1099-NEC in this circumstance would result in the contractor being notified of a potential missing TIN and may subject you personally to backup withholding.
7. A 1042-S must be issued to nonresident aliens, including foreign individuals who are exempt from U.S. tax due to a tax treaty. Form 1042-S is filed with the IRS and furnished to the recipient by the due date of March 15th of each year. If March 15 falls on a weekend or legal holiday, the due date is the next business day.
8. Forms W-9, vendor invoices, and receipts must be retained for 4 years.

The bookkeeping procedures of most businesses contain the biggest errors. Bookkeeping services that tag each payment by payee and location save the most hassle during tax season. Treaty payments still get reported. A U.S.-source payment to a foreign person goes on a 1042-S even if a treaty means no tax is withheld.

Are State Rules Different?

Sometimes, the $2,000 reporting threshold to the IRS does not apply in the United States. For example, Wisconsin and Mississippi still require reporting at the $600 level.

California has its own withholding rule for payments to nonresidents. If you pay a nonresident independent contractor for services performed in California, you must withhold 7% once total payments to that payee exceed $1,500 in a calendar year and report the withholding to the Franchise Tax Board on Form 592. Withholding is not required for services performed outside of California.

For this rule, nonresidents include individuals who are not California residents and business entities that are not registered with the California Secretary of State or have no permanent place of business in California.

Is Reporting Necessary If I Am Paying Myself as a Nonresident Owner?

If you are a foreign person owning a single-member LLC, the LLC is disregarded for tax purposes, and its income is reported on your individual return, generally Form 1040-NR. The distribution to you is not reported on a 1099 or 1042-S. Instead, the LLC reports its transactions with you, including distributions, on Form 5472, attached to a pro forma Form 1120. 

The penalty for not filing Form 5472 is $25,000 per year. Be sure to add completing and filing Form 5472 to your annual to-do list, along with filing Form 1042-S.

FAQs About Filing a 1099 or 1042-S for Nonresident Payments

What is a 1099?

Generally speaking, a 1099 is used to report payments to U.S. entities. If a foreign contractor is performing all work outside the U.S., you would have the contractor sign a W-8BEN and keep it for your records.

Is there a minimum to report on a 1042-S?

There is no minimum to report on a 1042-S, unlike a 1099. Any payment made to a foreign person for work considered to be performed in the U.S. would be reported on a 1042-S.

Will reporting a payment through Wise or PayPal exempt me from filing a tax form?

No. Payments made through Wise or PayPal do not change your tax form reporting responsibilities.

Will I be exempt from reporting a payment to a foreign contractor if I don’t receive a completed W-8BEN?

No. You must obtain a W-8BEN to determine whether a tax treaty applies; if it does, you must withhold a lower amount. You may withhold the full 30% until the form is provided.

Will a foreign contractor be required to obtain an ITIN?

Usually not. A foreign contractor who performs all work outside the U.S. provides you with a W-8BEN. A foreign contractor claiming a tax treaty benefit generally provides a taxpayer identification number on the W-8BEN, and, for payments for services, the IRS instructions allow the contractor to provide the tax ID issued by their country of tax residence instead of a U.S. TIN.