Q&A #170 – Must nonprofits issue a Form 1099 for a contractor based in a foreign country?
Question: My nonprofit organization works with a variety of consultants and other contractors. One of our consultants is a U.S. citizen who recently moved to another country outside of the United States and will be billing us through his 1-person business as he had before. Should we continue filing Form 1099 or do different reporting obligations apply now that this consultant is based in a foreign country?
Answer: In general, payments made by a nonprofit organization to consultants or contractors who qualify as “United States persons” under the Internal Revenue Code are subject to Form 1099 reporting, including U.S. citizens based abroad. Payments made to foreign persons are generally not subject to Form 1099 reporting but may be subject to withholding and reporting under Form 1042 and 1042-S.
Contracting with individuals and businesses outside of the United States raises numerous complex tax issues. The first step in understanding your organization’s reporting obligations is to determine whether the payee is a “United States person” under Section 7701(a)(30) of the Internal Revenue Code.
As summarized on the IRS website, a “U.S. person” generally includes citizens or residents of the United States, domestic business entities (in other words, partnerships or corporations “created or organized in the United States or under the law of the United States or of any State, or the District of Columbia,” as explained on this IRS page), as well as certain other estates, trusts, and persons that are not treated as “foreign persons.”
Payments made by a nonprofit organization to a U.S. person in the course of carrying out the organization’s operations that total $600 or more during the calendar year must be reported on Form 1099, unless subject to an exception such as the ones we’ve discussed in prior articles, for example scholarship payments and properly documented expense reimbursements paid to a Board member. Consequently, nonprofit organizations should obtain a completed Form W-9 from all contractors who are (or may be) U.S. persons unless the contractors establish “foreign person” status by providing a Form W-8BEN or Form W-8BEN-E (as discussed below).
For example, Form 1099 reporting will apply to contractors who are U.S. citizens even if they live and work in a foreign country. Similarly, as explained in IRS Publication 515, a U.S. person who receives payment through a foreign or domestic “disregarded entity” (i.e., a “flow-through” business entity with a single owner that is not a corporation or an equivalent type of entity that has its own separate legal identity for tax purposes) will likely also be subject to Form 1099 reporting). This appears to be the case in the question posed above and is relatively common when U.S. citizens working abroad are required to form a sole proprietorship type of business entity in that country (although you should seek guidance from a qualified attorney before determining whether a foreign entity meets the definition of a “disregarded entity”).
In contrast, Form 1099 reporting generally does not apply to payments made to individuals and businesses that are not U.S. citizens, U.S. residents, or which do not otherwise qualify as “U.S. persons.” When contracting for services with a foreign person, a Form W-8BEN (or Form W-8BEN-E for business entities) must be obtained to document the payee’s foreign person status, and guide the organization as to whether, and what type, of U.S. tax withholding and reporting may be required (if any). When applicable, U.S. tax withholding on payments made to a foreign person is reported on Form 1042 and 1042-S.
Planning Tip – If your organization is planning to hire a contractor based outside of the United States, do not assume that the laws of the foreign country do not apply. A contractor working outside of the United States could be subject to very different laws, requirements, and protections related to issues such as employee vs. contractor status, intellectual property rights, tax obligations in the foreign country, and more. Make sure to seek guidance from an attorney qualified to advise on the laws of that foreign country, in addition to seeking advice on your organization’s obligations under U.S. law.
However, this Q&A provides only a very basic guide. There are many potential complications and exceptions that are outside the scope of this piece, such as situations involving foreign agents and intermediaries, and foreign persons who temporarily reside and perform services in the United States (some of these situations are discussed in the IRS Instructions for Forms 1099-MISC and 1099-NEC and the General Instructions for Certain Information Returns). Consequently, this is an area where it is especially crucial to seek qualified legal counsel guidance before taking action.
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