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Every US business owner who hires their first offshore specialist reaches the same moment: it is January, your bookkeeper asks for the 1099 list, and you have no idea whether the person who has been doing your accounts receivable from Bengaluru belongs on it.
The instinct is to treat them like any other contractor. You paid someone who is not an employee, for services, in the course of your business — that sounds exactly like a 1099-NEC. Most owners either issue one unnecessarily, or quietly leave the payment off the list and hope nobody asks.
Both responses come from the same gap: the rule that governs this is not a rule about contractors at all. It is a rule about where income comes from.
Start with the source rule, not the form
The IRS determines what it can tax and what must be reported by first asking where income is sourced. For services, the answer is refreshingly physical. The IRS states it plainly:
That is the whole hinge. A specialist sitting in Pune, working on your books, is performing services outside the United States. That compensation is foreign-source income — not US-source income that happens to be paid by an American company. Who writes the cheque does not determine source. Where the hands do the work determines source.
The IRS also gives the allocation method for split cases: where services are performed partly inside and partly outside the country, "U.S. source income is the amount that results from multiplying the total amount of pay by the fraction of days in which services were performed in the U.S." If your specialist never sets foot in the US, that fraction is zero.
Hold that conclusion — foreign-source — and every other question in this guide answers itself.
What Form 1099-NEC actually covers
The IRS lists four conditions, all of which must be met, before a business files a 1099-NEC for nonemployee compensation:
| # | Condition (IRS wording) |
|---|---|
| 1 | "You made the payment to someone who is not your employee." |
| 2 | "You made the payment for services in the course of your trade or business" |
| 3 | "You made the payment to an individual, partnership, estate, or in some cases, a corporation." |
| 4 | "You made reportable payments to a payee that total the threshold amount or greater during the year." |
Read condition 3 carefully, because it is where the offshore case separates. The 1099 series is the information-reporting system for US persons. It is built on the taxpayer identification number your payee gives you on a Form W-9. A foreign individual or foreign company is not a W-9 filer and does not sit inside that system.
The IRS says what happens instead, in the same guidance:
So the offshore contractor is not simply exempt from paperwork — they are routed to a different form. Which raises the obvious next question.
Why Form 1042-S usually does not apply either
Look at the full title of that form: *Foreign Persons' U.S. Source Income Subject to Withholding*. The reporting regime it belongs to only engages when the income is US-source. The IRS is explicit about the withholding side:
And more broadly:
Every sentence turns on those three words. US-source income received by a foreign person triggers withholding and 1042-S reporting. Foreign-source income does not.
So the chain closes:
- Services performed abroad produce foreign-source income (IRS source rule).
- 1099-NEC covers US persons inside the W-9 system; foreign persons route to 1042-S instead.
- 1042-S and the 30% NRA withholding regime apply to US-source income.
- Your specialist's income is not US-source — so neither form is triggered in the ordinary case.
That is not aggressive planning. It is the plain reading of four pieces of published IRS guidance, all linked in the sources section below.
So what do you keep on file?
Nothing being filed does not mean nothing being documented. Good practice — and what a competent accountant will ask for — is a W-8 form establishing that your payee is in fact foreign. That is the entire purpose of the W-8 family. The IRS describes W-8BEN-E as follows:
Which W-8 you want depends on who you are actually paying:
| You are paying | Form to request | Why |
|---|---|---|
| A foreign company (a staffing provider, an agency, an incorporated studio) | W-8BEN-E | Documents the entity's foreign status for chapters 3 and 4 |
| A foreign individual directly (a freelancer you found yourself) | W-8BEN | The individual equivalent of the same certification |
| A US entity — including a US subsidiary or US-registered arm of an offshore provider | W-9 | This payee is inside the US system, so normal 1099 rules can apply |
That last row is the scenario where the answer flips, and it is worth understanding rather than skimming.
The one case where you may issue a 1099
If your contract is with a US-registered entity, the offshore location of the workers stops being the deciding factor for your reporting. You are paying a US person. You collect a W-9, and the ordinary 1099 analysis applies — including the corporation exception in condition 3 above, which is why many US-entity payments still do not generate a 1099.
This matters practically, because a number of providers offer both. At Zedtreeo, engagements are contracted through our operating company, LegelpTech Outsourcing Private Limited, by default — a foreign entity, hence W-8BEN-E. Where an engagement is instead contracted with our US entity, as agreed in writing, a W-9 applies. The paperwork follows the entity on the contract, not the passport of the person doing the work.
The lesson generalises: before you can answer the 1099 question, you have to know which entity is on your agreement. Owners who get this wrong usually got it wrong at the contracting stage, not the filing stage.
Where the confusion usually comes from
Four recurring mix-ups account for most of the wrong answers we see owners arrive at.
"I paid from a US bank account, so it's US income." The payer's location is not the test. The place of performance is the test.
"They invoiced me like a contractor, so they're a 1099 contractor." An invoice is a commercial document, not a tax classification. The classification comes from who the payee is and where the work happened.
"My accountant said issue one to be safe." Issuing a 1099-NEC to a foreign entity is not a harmless belt-and-braces move — it asserts something inaccurate about your payee's status, and it requires a TIN you should not have. The safe move is the W-8 on file, not a form filed into the wrong regime.
"There's a threshold, so under it I do nothing." The threshold in condition 4 only matters once conditions 1 through 3 are met. For a foreign payee you never reach condition 4, so the threshold is irrelevant either way.
What to actually put in your file
Because nothing gets filed with the IRS in the ordinary case, the whole burden here is record-keeping. If your position is ever questioned, the question will not be "did you file the right form" — it will be "can you show why no form was required." Four things make that a short conversation.
The W-8, dated and current. A W-8BEN-E from a foreign entity, or W-8BEN from a foreign individual. Request it at the start of the engagement rather than the end of the tax year, when getting a counter-signature from a vendor becomes surprisingly slow.
The contract naming the entity. This is the document that determines which analysis applies. If your agreement is with a foreign operating company, keep the version that says so — including any addendum that changed the contracting party mid-engagement, which is exactly the detail that gets lost.
Invoices showing a company payee. Company-to-company invoices, ideally referencing the same legal entity as the contract. An invoice from an individual's name against a contract with a company is the kind of inconsistency that invites questions.
A note on where the work is performed. One line in your engagement file stating that services are performed outside the United States. It sounds almost too obvious to record, but it is the single fact the entire conclusion rests on, and it is the one thing nobody thinks to document.
None of this is onerous — it is four documents in a folder. What makes it worth doing deliberately is that the reasoning is invisible in your books. A payment to a foreign company looks identical to a payment to a domestic one on a bank statement; the file is what carries the explanation.
What this looks like in a managed engagement
If you work with a provider rather than hiring an individual abroad directly, most of this collapses into ordinary vendor accounting. You are not paying a person in another country; you are paying a company for a service, and it books like any other supplier invoice.
In our own case that means: one monthly invoice from the contracting entity, issued in USD, with a W-8BEN-E available on request for your file. No 1099 for the specialist, no TIN to chase, no withholding calculation. The employment relationship, payroll, and local compliance sit with the operating company rather than with you — which is the actual reason the paperwork is lighter, and the reason it is worth checking that a provider genuinely employs its staff rather than passing individual contractors through to you.
Where a provider does pass individuals through, you are back to paying a foreign individual directly: W-8BEN, and a good deal more diligence about who you are really engaging.
Sources
- IRS — Source of Income: Personal Service Income (the place-of-performance rule)
- IRS — Reporting Payments to Independent Contractors (the four 1099-NEC conditions; routing of nonresident-alien compensation to Form 1042-S)
- IRS — NRA Withholding (30% withholding applies to US-source income)
- IRS — About Form W-8BEN-E (purpose: foreign entities documenting status for chapters 3 and 4)
Frequently Asked Questions
Do I need to issue a 1099 to an offshore contractor?
In the ordinary case, no. Form 1099-NEC applies to payments to US persons inside the W-9 system; compensation paid to a nonresident alien routes to Form 1042-S instead, and that form covers US-source income. Because the source of services income is determined by where the work is performed, a specialist working abroad generates foreign-source income and neither form is triggered. Confirm your own position with your tax advisor.
What form should I collect instead?
A W-8. Request W-8BEN-E if you are paying a foreign company, or W-8BEN if you are paying a foreign individual directly. The IRS describes W-8BEN-E as the form "used by foreign entities to document their status for purposes of chapter 3 and chapter 4." Keep it on file; you are not filing it with the IRS.
Do I have to withhold 30% from payments to an offshore worker?
Not where the income is foreign-source. The IRS describes NRA withholding as the regime "that requires 30% withholding on a payment of U.S. source income." Services performed entirely outside the United States are not US-source, so the regime does not engage. If any portion of the work is performed inside the US, the allocation rule applies and you should take advice.
What changes if the provider has a US entity?
Everything about your reporting. If your contract is with a US-registered entity, you are paying a US person: collect a W-9 and apply the normal 1099 analysis, including the corporation exception. This is why knowing which entity signs your agreement matters more than knowing where the workers sit.
Does it matter that I pay from a US bank account?
No. The payer's location does not determine the source of services income — the place where the services are performed does. Paying from a US account, in US dollars, does not convert foreign-source income into US-source income.
Is it safer to just issue a 1099 anyway?
No, and it is a common misstep. Filing a 1099-NEC for a foreign entity asserts something inaccurate about your payee's status and requires a taxpayer identification number you should not be collecting. The documented, defensible position is a W-8 in your file.
What if my offshore specialist visits the US for a week?
Then a portion of their compensation may become US-source, and the IRS allocation method applies: US-source income is the total pay multiplied by the fraction of days services were performed in the US. Short business visits are exactly the situation to raise with your advisor before the trip rather than after.
How does this work with a managed staffing provider?
It becomes ordinary vendor accounting. You receive one invoice from the contracting company for a service, with a W-8BEN-E available for your file — no 1099 for the individual, no TIN to chase, no withholding calculation. The distinction worth checking is whether the provider genuinely employs its specialists or passes individual contractors through to you, because the second case puts you back in a direct-payment relationship with a foreign individual.