Reporting income and taxes withheld on payments made to corporate vendors recently became more challenging for accounts payable (A/P) departments of both for-profit and not-for-profit organizations with the new IRS compliance focus on payments to nonresident alien individuals, foreign entities and foreign governments (collectively, foreign persons). A/P departments familiar with the ins and outs of Form 1099 reporting now must master not only the long-standing (but long-ignored) withholding requirements for U.S.-source income payments to their vendors who are foreign persons (called NRA withholding), but also the requirements for reporting income and taxes withheld, if any, to their foreign vendors and the IRS on Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.
Regardless of the name of the form, most U.S.-source income payments made to foreign vendors are subject to Form 1042-S information reporting, whether taxes were required to be withheld on the payment or not. Since only U.S.-source income is reportable, the determination of whether a payment is reportable or not must be made at the transaction level, not at the vendor level as has been the case historically for most payments to U.S. vendors.