At BNC Tax, our clients often ask us, “Do I need to file 1099s as an expat business owner?” And the answer is most likely yes (if you hire U.S. citizens.)
All business entities from sole proprietorships to large corporations have a requirement to determine if they need to file Form 1099 to report payments made to contractors. It’s essential to be aware of your responsibilities and the deadlines associated with this filing requirement.
If you’ve hired individuals or businesses this year and paid them $600 USD or more, you may be required to send them 1099s and file 1099s with the IRS.
A lot of people understand the $600 threshold for 1099s, but there are some other rules that you need to be aware of, in order to make sure that you or your business are filing 1099s correctly.
The issues get more complicated for expats and people doing business with foreign nationals or foreign companies. Let’s break down the IRS rules about 1099 filing.
What is a 1099?
Form 1099 is used to report various types of income other than salaries, wages, and tips. It is a key component of the U.S. tax system, designed to track and report income that may not be subject to traditional withholding.
According to the IRS, “Payers use Form 1099-MISC, Miscellaneous Information and/or Form 1099-NEC, Nonemployee Compensation to:
- Report any amount of federal income tax withheld under the backup withholding rules (Form 1099-MISC or Form 1099-NEC).
- Report payments of $10 or more made in the course of a business in royalties or broker payments in lieu of dividends or tax-exempt interest (Form 1099-MISC).
- Report payments of $600 or more made in the course of a business in rents, prizes and awards, other income and for other specified purposes, including gross proceeds paid to an attorney (Form 1099-MISC).
- Report payments of at least $600 in the course of a business to a person who’s not an employee for services, including payments to an attorney (Form 1099-NEC).
- Report sales totaling $5,000 or more of consumer products to a person on a buy-sell, a deposit-commission, or other commission basis for resale (Form 1099-MISC or Form 1099-NEC).
Payers file Forms 1099-MISC and 1099-NEC with the IRS and provide them to the person or business that received the payment.
Who needs to file 1099s?
According to IRS rules, any business “engaged in trade or business” with a U.S. citizen individual (freelancer / independent contractor), a U.S. business, or a foreign business with a U.S. citizen owner may be required to file a 1099 with the IRS, per the rules outlined above. Let’s break this down further.
The IRS instructs us to report on Form 1099 only when payments are made in the course of your trade or business. Personal payments are not reportable. You are engaged in a trade or business if you operate, or intend to operate, for gain or profit.
What if I live abroad and operate my company outside the U.S.?
The IRS requirement to file form 1099s is a wide-ranging net and essentially any company in the world can be in scope of U.S. 1099 filing regulations. Foreign entities with connections to the United States either through U.S. beneficial owners, physical presence in the U.S., or engaging in business in the U.S. must follow U.S. reporting rules as if they are a U.S. company.
“Ultimate Beneficial Owner” or other U.S. party
“Ultimate beneficial owner” means the owner of a company who ultimately benefits from company profits. If the ultimate beneficial owner of a company is an U.S. citizen, then payments made to that company have a 1099 filing requirement.
Let’s take BNC Tax as an example of a business with a U.S. citizen ultimate beneficial owner.
BNC Tax & Accounting BV is a Dutch corporation, and the owner is a U.S. citizen.
If your business entity or sole proprietorship hires BNC Tax & Accounting BV for tax preparation or consulting services, if the total amount you pay is more than $600 USD then per IRS rules your business must send a 1099 to BNC Tax & Accounting BV.
If you hire BNC Tax & Accounting BV as an individual, you don’t need to send us a 1099. Payments made to BNC tax for individual tax preparation services are not subject to the “trade or business reporting” requirement on the 1099.
Form W-9 and W-8 BEN
If you’re doing business with other businesses, how are you supposed to know who their “ultimate beneficial owner” is? The only way to know is to ask all companies that could be in scope for a W-form. That could be a W-9 in the case of a U.S. entity, or a W-8 BEN or W-8 BEN-E in the case of a foreign entity.
If your business hires a U.S. party (freelancers / independent contractors / business entities) you must collect a W-9 from each party at the time the payment is made, and send them a 1099 at the end of the year.
The W-9 form provides important information, such as the contractor’s business classification, Employer Identification Number (EIN) and address, which is essential for accurate reporting on Form 1099. You can download the W-9 form directly from the IRS website here.
If your business hires foreign nationals (non-American citizens) who do not live in the U.S., you must collect a W-8 BEN from each person. The W-8 BEN states that the person does not live in the U.S. and is not subject to withholding. Failure to collect a W-8 BEN can have costly penalties.
This also applies to U.S. citizens living abroad and their companies.
If you’re running a company abroad and you hire U.S citizens or businesses owned by a U.S. citizen, you need to send 1099s. If you have any reason to believe that you are doing business with a presumed U.S. party, you should ask for a W-9 when you make the payment for services.
Exceptions to reporting:
If you are doing business with a non-U.S. party performing services not within the U.S., and you have a reasonable presumption that the company has no U.S. connection you do not need to collect a W-form. However, it is still recommended to ask the party to verify that they are not a U.S. party. You could ask the party to confirm they are not a U.S. party and document the response for your records.
Key Due Date:
The deadline for providing 1099s to recipients is January 31st for both the recipient copy and the IRS whether filed by mail or electronically.
Remember, you are required to collect the W-form or other information regarding the payee as the payment is made. Don’t wait until year-end to ask for information reports!
How BNC Tax Can Help:
Navigating the complexities of Form 1099 filing can be challenging, but BNC Tax is here to assist you every step of the way. We offer professional 1099 filing services to ensure that you meet all your reporting obligations accurately and on time. Book an appointment at https://www.bnctax.com/appointment/