Payments to a non resident

[ConnorandCo]

Good morning, I have a client who has a "S" corp for IT repairs and consulting. She pays someone who lives in India directly for the repairs and consulting. Is she required to withhold any of the money she pays him? I have done some research into the tax treaty's and form 8233. From the instructions it seems they are referring to work that is done here in the US, not work that is done in India. He does not come to the US at all, nor does he have a TIN or SSN.

[AZUKHiker]

In these situations go through a quick checklist:

1. Is the person doing the work who lives overseas a US Citizen or Green Card holder? If so get a W-9 from them and do a 1099-Misc at the end of the year depending on the answers on the W-9.

2. If they aren't a US Citizen or Green Card holder is any of the work done in the US. If so then you are probably looking at 30% withholding unless they complete a W-8BEN or W-8BEN-E to claim a lower treaty rate.

3. If none of the above apply then no US tax reporting required although to be safe I would still get them to complete a W-8BEN if they are an individual or W-8BEN-E if an entity.

[ATSMAN]

Good morning, I have a client who has a "S" corp for IT repairs and consulting. She pays someone who lives in India directly for the repairs and consulting. Is she required to withhold any of the money she pays him? I have done some research into the tax treaty's and form 8233. From the instructions it seems they are referring to work that is done here in the US, not work that is done in India. He does not come to the US at all, nor does he have a TIN or SSN.

Have you looked at form 1042 if that applies?

One of my US clients had the reverse situation for Technical consulting. The Indian company was withholding 20% of his fees in India and he had to file a Indian tax return separately to get a refund.

[TAXNJ]

Some more info

Some interesting info from a respected law firm may or may not apply to your scenario and should not be limited to this info:

Andrew Mitchel LLC is a law firm with extensive experience in international tax planning:

Form 1099 for Payments to Foreign Contractors for Services?
UPDATE - 9/23/14: For payments to foreign entities, see our blog post (Payments to Foreign Contractor Entities: Form W-8BEN-E).
One question that often comes up is how a domestic U.S. business should treat payments to a foreign contractor for services performed outside the U.S. Is a Form 1099 required? Is withholding required?
As long as the foreign contractor is not a U.S. person and the services are wholly performed outside the U.S., then no Form 1099 is required and no withholding is required.
Not a U.S. Person
So, how do you “know” that the foreign contractor is not a U.S. person? If the contractor is an individual, perhaps he or she is a U.S. citizen living outside the U.S.? While you may be able to rely on certain presumptions regarding the foreign contractor’s status (Treas. Reg. §1.1441-1(b)(3)), it is generally easier to simply ask him or her to complete a Form W-8BEN. By signing Form W-8BEN, the foreign contractor is certifying that he or she is not a U.S. person.
In this circumstance there is no need for the foreign contractor to get a U.S. taxpayer identification number or to complete Parts II or III of Form W-8BEN. All that the foreign contractor needs to do is to complete the basic information in Part I and sign in Part IV, attesting that the information is true, correct, and complete. No Form 1099 then needs to be filed for payments to foreign persons. Treas. Reg. §1.6041-4(a).
The Form W-8BEN is not filed with the I.R.S. It is kept on file with the U.S. payor in case the U.S. payor is audited. If audited, the Form W-8BEN supports why no Form 1099 was issued and why no tax was withheld.
Where Were the Services Performed?
Now that you know that the foreign contractor is not a U.S. person, how do you know that he or she is not performing some or all of the services in the U.S.? Perhaps he or she spends two or three months a year at his or her second home in the U.S. and he or she works on your project while in the U.S.?
You won’t know if the services are performed in the U.S., unless you ask. There is no special form for this. The easiest way is to get a signed statement from the foreign contractor that he or she will not perform any of the services in the U.S. It is typically best to attach this statement to the W-8BEN.
Form 1042 must be filed with respect to certain payments to foreign persons. Code §1461 and Treas. Reg. §1.1461-1. However, Form 1042 is required only for payments of “U.S. source income.” If the payments are for services and the services are performed outside the U.S., then the payments will be foreign source income (Code §861(a)(3) and Treas. Reg. §1.861-4), and no Form 1042 will be required.
When in Doubt, Withhold
Say that you have some reason to doubt the veracity of the foreign contractor’s statements. Perhaps you know that he or she was born in the U.S. (which would make him or her a U.S. citizen, unless he or she renounced his/her U.S. citizenship)? Perhaps you know that the foreign contractor spends a good amount of time in the U.S. and you believe some of the services may be performed in the U.S.?
If you do not withhold tax on the payments to the foreign contractor but you are required to withhold, then you, as the payor (i.e., the “withholding agent”), can be held liable for the tax that you did not withhold. Treas. Reg. §1.1441-1(b)(7). Thus, if you are uncertain as to whether you need to withhold, it is generally better to withhold. If the foreign contractor does not owe U.S. tax, then he or she can file a U.S. tax return and claim a refund for the tax that was withheld.

Posted on October 07, 2012 in 1441 U.S. Withholding Taxes, Form 1042, Form W-8 BEN / BEN-E