U.S. organizations making payments to vendors must determine whether the vendor is a U.S. person or a non-U.S. person because only payments to U.S. persons (actual or presumed) are covered by Form 1099 rules and procedures. The term U.S. persons includes U.S. citizens, resident aliens [based on IRC §7701(b) tax residency rules], and domestic entities. Domestic entities are entities organized under the laws of one of the 50 states or the District of Columbia. Non-U.S. persons include nonresident aliens and foreign entities (collectively foreign vendors).
Absent an exception, payments to foreign vendors are subject to 30 percent NRA withholding, but only on their U.S.-source income. (Beginning January 1, 2014, payments that are not excluded nonfinancial payments made to foreign vendors that are entities might be subject to FATCA withholding rather than NRA withholding.) Income, along with any taxes withheld, must be reported on a Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. In order to withhold and report correctly on payments to foreign vendors, a payer must know the source of the income U.S. or foreign—as defined by U.S. tax rules. If the source of income is unknown at the time the payment is made, the payer must presume it to be U.S.-source income and withhold accordingly.
[See Treas. Reg. 1.1441-2(a)].
This is the first in a series of blog posts covering the nature of income on payments to foreign vendors. Be on the lookout for additional posts in the series over the coming weeks.
Thomson Reuters ONESOURCE Nonresident Alien Taxation has a number of webcasts to help organizations understand payments to foreign students, workers, and vendors. Visit our webcast page to view a complete schedule and register for a webcast.