On a project I'm doing, I have a subcontractor in Montreal. He's a Canadian citizen, and has an SSN because he used to work in the US, but he doesn't currently have a US visa. The project is a one-off, so I'll make one or two payments this year when the client pays me.
As I read the IRS pubs, he sends me a W-8BEN confirming that he lives in Canada, and I can pay him without withholding the 30%.
At the end of the year, do I have to issue him a 1099?
Assuming he performs his work in Canada, he is not subject to any withholding as he has no US source income. But.... assuming you intend to take a business deduction for the payments to him, you need to file Form 1042-S to substantiate your payments. 1042-S: Use income code 16 (compensation for independent personal services) for Box 1 and use withholding exemption code 03 (income is not from US sources) for Box
3a. Country code is CA.You can disregard everything after line 14d.
The form instructions tell you the where, when and how of filing.
Thanks. How come it's 03 (non US) rather than 04 (tax treaty)? I'm in New York, the payor is in Virginia, so what's non-US?
R's, John
The source for compensation is where the work is performed. The IRC does not require withholding when the source is not the US.
It's pretty rare I find occasion to disagree with Alan, but this topic came up at a recent presentation by an IRS foreign taxation specialist, and here is his reply, indicating that 1042-S is not required, but having a W-8BEN on file might be a good idea.
====[begin response]==========================As to the limited information provided in the e-mail string below, and for federal tax required information return reporting purposes, you are correct in stating that a Form 1042-S is not required in the following situation:
The Canadian payee is a nonresident alien of the U.S. under the residency rules of the U.S. Internal Revenue Code (IRC 7701(b)). The Canadian payee was paid by a U.S. company for personal services he performed in a foreign country. Under U.S. law the payments described above constitute foreign source income to the Canadian payee because the personal services were performed in a foreign country.
This is true even though the payor of the income is a resident of the United States.
The payments described above are not taxable to the Canadian payee because the foreign source income of a nonresident alien is not taxable by the United States. The payments described above are not subject to withholding of U.S. federal income tax by the U.S. payor of the income. The payments described above are not reportable by the U.S. payor to the U.S. Internal Revenue Service (IRS) on Form W-2, Form 1099-MISC, or on Form 1042-S. In short, under the provisions of the U.S. Internal Revenue Code, neither the U.S. payor of the income, nor the Canadian payee, has any reporting requirement, withholding requirement, filing requirement, or payment requirement with respect to the payments described above. Furthermore, because the payments are not subject to any U.S. reporting requirement, withholding requirement, filing requirement, or payment requirement , there is no need for the Canadian payee to invoke the provisions of the USA-Canada income tax treaty because the payments are not taxable by the United States under the provisions of the U.S. Internal Revenue Code.
Also, as I mentioned in my December 2014 presentation:
The Canadian payee should prepare and file a Form W-8BEN with the U.S. withholding agent so that the U.S. withholding agent has documentation that the [Canadian] payee is a nonresident alien (a foreign person). If Form W-8BEN is used solely for the purpose of establishing that the payee is a foreign person, there is no need for the payee to report his U.S. taxpayer identification number on such Form W-8BEN. On the other hand, if in the future the payee were to use Form W-8BEN or Form 8233 for the purpose of claiming a reduction of withholding of U.S. federal income tax under the provisions of a U.S. income tax treaty, then it would be mandatory for the payee to report his U.S. taxpayer identification number on such forms or the treaty claims on such forms would be invalid. A U.S. taxpayer identification number is:
A U.S. Social Security Number (SSN) issued by the U.S. Social Security Administration. An Individual Taxpayer Identification Number (ITIN) issued by the IRS. An Employer Identification Number (EIN) issued by the IRS.
Please see the doc file attached to this message which provides citations from the Internal Revenue Code to support the above conclusions.
==========[end response]===========================
I don't disagree. An information return is not required for this fact set. However, substantiating a business deduction requires proof of payment and evidence of the character of the transaction. A cancelled check to Jon Smith of Montreal, CA establishes payment but is not proof of the character of the payment. That is why, I always recommended that the 1042-S be issued.
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