A developer in Lisbon, working in Lisbon, invoicing your Delaware C-corp: collect a Form W-8BEN before the first payment, withhold nothing, and file nothing. No 1099, no Form 1042-S, no Form 1042.
That same developer spends two weeks at your office in Austin on the same contract. Now you owe 30 percent of what you pay for those two weeks to the IRS, you have a Form 1042-S to file by March 15, a Form 1042 to file with it, and a deposit schedule to keep.
One fact moved between those two paragraphs. Not the contract, not the currency, not the invoice, not the contractor's passport. Only the physical location of the person while the work was being done.
The rule that decides everything
Section 862(a)(3) sources compensation for labor or personal services performed outside the United States to outside the United States. Section 861(a)(3) sources compensation for services performed in the United States to the United States. That pair of sentences is the entire test, and it turns on one input.
Everything a founder reaches for instead is irrelevant to it. Citizenship does not appear in either section. Tax residence does not. Neither does the currency, the bank, the country the money leaves from, the place the contract was signed, or where your company is incorporated. A US company paying a US citizen who has lived in Berlin for a decade and does all the work there is paying foreign source income. A US company paying a Brazilian national who flew in to work onsite is paying US source income for those days.
Withholding under section 1441 reaches US source income only. The statute says so in terms: the 30 percent applies to the listed items of income "to the extent that any of such items constitutes gross income from sources within the United States." Foreign source compensation is outside chapter 3 entirely. There is nothing to withhold, nothing to deposit, and nothing to report.
There is one narrow exception running the other way, in the back half of section 861(a)(3). Services performed in the United States are not US source if the person is a nonresident alien temporarily present for no more than 90 days in the year, the compensation does not exceed $3,000 in aggregate, and the services are performed under a contract with a foreign person not engaged in a US trade or business, or for a US person's office abroad. Read that third condition before relying on the first two. A contract with your US company does not satisfy it. The carve-out was written for someone a foreign employer sends over, not for your own contractor.
Why there is no 1099
Regulation 1.6041-4(a)(1) is the provision that stops the information return. Returns of information are not required for payments that a payor can, prior to payment, reliably associate with documentation on which it may rely to treat the payment as made to a foreign beneficial owner.
Two words in that sentence carry the weight. "Prior to payment" means the W-8BEN has to exist before the money moves, not before the January filing deadline. And "reliably associate" means the form has to be complete, consistent with what else you know, and connected in your records to the specific payee you are paying.
This is the opposite of how 1099 season usually runs. With a domestic contractor, a missing W-9 in January is a chase and an annoyance. With a foreign payee, documentation gathered after payment does not reach back and fix the payment.
Why there is no 1042-S either
Founders who learn that the 1099 is out often assume the foreign equivalent is in. The instructions to Form 1042-S say otherwise. Amounts subject to reporting on that form are "amounts from U.S. sources paid to foreign persons," and the instructions state directly that foreign source income is generally not required to be reported on Form 1042-S. The exemption code for income not from US sources exists for limited circumstances, such as withholding applied in error.
So for the ordinary case, the whole apparatus is dormant. You hold a W-8BEN in your files, you book the expense, and no federal form carries the payment anywhere. The W-8 is a record, not a filing. It never goes to the IRS.
What switches on when the work happens on US soil
Payments for independent personal services performed in the United States are US source, and the instructions to Form 1042-S list them by name as amounts subject to reporting, with income code 17. Once that is your fact pattern, four separate obligations arrive together.
Withholding at 30 percent of the gross. The tax under section 1441 is imposed on the gross amount paid, not on a net or a margin. If you pay a $10,000 invoice for onsite work and withhold correctly, the contractor receives $7,000.
Deposits on a schedule, electronically. The amount withheld goes to the IRS through EFTPS or IRS Direct Pay, and the frequency depends on the balance. If undeposited tax reaches $2,000 at the end of any quarter-monthly period, meaning the 7th, 15th, 22nd or last day of a month, it is due within three business days. If the month-end balance is at least $200 but under $2,000, it is due within 15 days of month end. Under $200 for the whole year, you may pay it with the return.
Form 1042-S by March 15, both to the IRS and to the recipient. Paper copies go in under a Form 1042-T transmittal. Electronic filing is mandatory if you are required to file 10 or more information returns during the year in aggregate, which for most companies means any 1099s you file count toward the same 10. For 2026 forms, due March 15, 2027, the IRS instructions say IRIS must be used; either IRIS or FIRE may be used for 2025 forms due March 15, 2026.
Form 1042 as well. The rule is not conditional on having withheld. You must file Form 1042 if you are required to file any Form 1042-S, whether or not any tax was withheld or was required to be withheld, and you file it even when the 1042-S went in electronically.
The cost of getting this wrong sits on you rather than on the contractor. Section 1461 makes every person required to deduct and withhold liable for the tax. Pay the full invoice with no withholding and the 30 percent does not disappear; it becomes your liability, and you have already sent the cash that would have funded it.
The trap that runs backwards
Missing documentation does not drop you into the 30 percent regime. It drops you into the 1099 regime, which is the point most published guidance on this gets wrong.
Regulation 1.1441-1(b)(3)(iii) says a payment a withholding agent cannot reliably associate with documentation is presumed to be made to a US person. Not a foreign person. There are indicator-based exceptions, mostly for exempt recipients and offshore accounts: an employer identification number beginning with 98, correspondence mailed to a foreign country, a name on the per se list of foreign corporations, an offshore obligation. For an ordinary undocumented individual contractor, the default runs the other way.
A US person presumption means chapter 61 applies, which means a 1099 and backup withholding at 24 percent under section 3406 if no TIN was furnished. The W-8BEN instructions state both outcomes in one sentence: failure to provide the form when requested may lead to withholding at the foreign-person rate of 30 percent, or at the backup withholding rate under section 3406.
The practical consequence is that "we did not collect anything, so nothing applies" is not a position. It is a different and worse position than either of the documented ones.
Six mechanics in the form itself
It expires. A W-8BEN remains valid from the date it is signed through the last day of the third succeeding calendar year, unless a change in circumstances makes something on it wrong. The regulation gives the example: signed September 30, 2015, valid through December 31, 2018. A form collected in 2023 for a contractor you still pay went stale on December 31, 2026.
Changes have a 30-day clock. If a change in circumstances makes any information on a submitted W-8BEN incorrect, the payee must notify the withholding agent within 30 days and furnish a new form. Relocation is the common one, and it is the change that can move the sourcing answer at the same time.
Individuals and entities take different forms. W-8BEN is for individuals. An entity, including a one-person foreign limited company, uses W-8BEN-E, which asks for a chapter 4 status as well as a chapter 3 one.
W-8BEN is the wrong form for US-performed services with a treaty claim. Its own instructions say not to use it if you are a nonresident alien claiming exemption from withholding on compensation for independent or dependent personal services performed in the United States. That claim goes on Form 8233.
And Form W-8ECI does not rescue an individual. Regulation 1.1441-4(a)(1) exempts effectively connected income from section 1441 withholding, then excludes compensation for personal services performed by an individual from that exemption by name. Paragraph (b) governs instead, and its routes out are narrow: compensation that is wages subject to section 3402 withholding, residents of Canada or Mexico who cross frequently, or an exemption under the Code or a treaty.
The treaty route has a waiting period. Where a treaty exemption applies, the nonresident files Form 8233 with you, a separate one for each taxable year. If you accept it, you forward a copy to the IRS, and the exemption becomes effective only for payments made at least ten days after that copy goes in. Pay before the ten days run and you were supposed to withhold.
Treaty claims and the TIN question
A reduced rate or exemption under a treaty is claimed on line 10 of the W-8BEN, and the claim needs an identifying number to hang on. The instructions allow the foreign tax identifying number on line 6a to serve for treaty purposes instead of a US TIN on line 5, and line 6b exists for account holders whose jurisdiction does not issue one or does not require them to hold one. That matters because getting a US ITIN for a contractor who has no other US connection is slow, and for most treaty claims on services income it is avoidable.
What this looks like in the books
The compliance answer depends on a fact your accounting system probably does not store: where the person was sitting. An invoice records an amount, a date, a vendor and a currency. It does not record that three weeks of the work happened in California.
So the record has to be built deliberately, and the cheapest place to build it is at vendor setup rather than at year end:
- A foreign vendor flag on the vendor record, with the W-8BEN or W-8BEN-E attached to it and the signature date stored as a field rather than buried in a PDF.
- An expiry date derived from that signature date, December 31 of the third following year, on whatever list you actually review monthly.
- A place on the engagement record for where the services are performed, filled in when the contract is signed and revisited when travel happens.
- A rule that no first payment to a foreign vendor is released before the W-8 is attached, because "prior to payment" is the phrase the regulation uses and it is the only version of the test that works.
None of that is hard. It is just invisible until March, when either the answer is already written down or somebody is emailing contractors in four time zones asking where they were in August.
The short version
Work performed abroad by a foreign person: W-8BEN on file before you pay, no withholding, no 1099, no 1042-S, no 1042. Work performed in the United States by a foreign person: 30 percent of the gross withheld unless a Form 8233 treaty claim has been accepted and forwarded, deposited on the EFTPS schedule, reported on Form 1042-S and Form 1042 by March 15. Nothing on file at all: presumed a US person, which means a 1099 and possibly 24 percent backup withholding, and a liability that section 1461 puts on you.
The question worth asking your bookkeeper is not whether the W-8s are collected. It is whether anyone knows where the work was done.