Paying Foreign Contractors From Your US LLC: Why You Usually Don't Withhold Tax or File a 1042-S — and the W-8BEN That Proves It

When you set up a US LLC, your business often ends up running on a global team. A designer in Indonesia, a developer in Egypt, a virtual assistant in the Philippines, a video editor in Argentina. Every month you pay them from your US business account — and every month a quiet worry can follow the payment: does the IRS expect me to withhold 30%? Do I need to file some form? Should I be sending a 1099?

For most non-resident founders paying contractors who live and work abroad, the answer is reassuring. But it is only reassuring if you understand the one rule that decides it — and keep the one document that proves it.

The One Question That Decides Everything: Where Was the Work Done?

US tax law does not source a contractor's income by where your company is registered, where the money is sent from, or where the contract was signed. It sources it by where the work is physically performed.

The IRS states this plainly: the place where the personal services are performed generally determines the source of the personal service income, regardless of where the contract was made, the place of payment, or the residence of the payer.

So the question is never "Is my LLC American?" It is: "Did this person do the work inside the United States, or outside it?" For a freelancer sitting at a desk in Manila, Lagos, or Buenos Aires, the answer is "outside" — and that single fact changes everything.

Work Performed Entirely Outside the US Is Foreign-Source Income

When a foreign contractor performs all of their services outside the United States, the money they earn is foreign-source income — even though it is paid by your US LLC.

Foreign-source income paid to a foreign person is generally not subject to US withholding tax, and it is not reported on Form 1042-S (the form used to report US-source income paid to foreign persons). In practical terms, for these payments there is generally no 30% withholding, no Form 1042-S, and no Form 1042 filing.

This is the situation the vast majority of non-resident founders are in. Their editors, developers, designers, and assistants live abroad and work abroad. The payments leave a US account, but the income was earned on foreign soil, so the US has no claim to tax it at source.

Why a 1099 Doesn't Apply Either

Founders often assume that if there is no 1042-S, there must be a 1099. There usually isn't.

Form 1099-NEC is used to report payments to US persons — US citizens, US residents, and US businesses. A contractor who is a non-US person working abroad is not a US person, so a 1099 is simply the wrong form. You do not issue a 1099 to a foreign contractor.

So for the typical case — a foreign contractor doing foreign work — you file neither a 1099 nor a 1042-S. But "file nothing" is not the same as "document nothing," and that distinction is where founders get caught.

The W-8BEN: The Document That Protects You

If the IRS ever asks why you did not withhold or report, you need evidence that the contractor was a foreign person. That evidence is Form W-8BEN.

Form W-8BEN (for individuals) — or Form W-8BEN-E (for a foreign company) — is how a contractor certifies, under penalty of perjury, that they are not a US person. You, the payer, collect it and keep it in your records. It is not filed with the IRS; it is your proof.

Best practice is simple. Before you make the first payment, ask each foreign contractor to complete a W-8BEN. Many founders go one step further and ask the contractor to sign a short statement confirming that the services were performed entirely outside the United States, kept alongside the W-8BEN. If your LLC is ever examined, those two documents answer the question before it becomes a problem.

Remember that a W-8BEN is not valid forever. It generally expires at the end of the third full calendar year after it is signed, so refresh it periodically and whenever the contractor's circumstances change.

When the Rules Flip: Services Performed Inside the US

There is one scenario every founder should recognise, because it reverses the outcome: a foreign contractor who performs services while physically inside the United States.

If your contractor flies to the US for a project, attends a US event on your behalf, or does the work during a stay in the country, that portion of their pay becomes US-source income. US-source income paid to a foreign person is generally subject to 30% withholding (a lower treaty rate may apply), and it must be reported on Form 1042-S, with an annual Form 1042. If the work is split between US and non-US days, only the US-day portion is US-source and must be allocated accordingly.

This is rare for a typical remote team, but it is exactly the kind of detail that can turn a clean file into a penalty letter. When in doubt, ask where the person was physically located when they did the work.

A Quick Checklist Before You Pay

Before you send that first payment abroad, confirm three things: that the contractor is a non-US person (collect Form W-8BEN or W-8BEN-E), that the work is performed entirely outside the US (a signed statement helps), and that both documents are safely on file. If all three are true, there is generally no US withholding, no 1042-S, and no 1099 — you simply keep the paperwork. If any of the work is done inside the US, treat that portion as US-source and get proper advice on withholding and Form 1042-S before you pay.

Have Questions About Your Own Situation?

Every setup is a little different — a contractor who occasionally visits the US, a mixed team, or a payment platform asking for tax forms you have never seen. If you would like to talk yours through, the MP Partner experts team is happy to help: no pressure, no hard sell, just clear answers.

Book a free consultation with our experts →