United States — Hiring & Payroll Setup

Every employer in the United States — including foreign multinationals hiring their first U.S. employee — must complete Form I-9, Employment Eligibility Verification, for each individual hired for employment after November 6, 1986. This requirement, imposed by the Immigration Reform and Control Act of 1986 (IRCA), codified at 8 U.S.C. § 1324a, applies to all new hires regardless of citizenship or immigration status; U.S. citizens, lawful permanent residents, and foreign nationals with work authorization are all subject to the same verification process.

## The two-section I-9 process

Section 1: Employee attestation. The employee must complete and sign Section 1 of Form I-9 no later than the first day of employment (the first day of work for pay), but not before accepting a job offer. The employee attests to their identity and employment-authorization status by checking one of four boxes: (1) U.S. citizen, (2) noncitizen national of the United States, (3) lawful permanent resident, or (4) alien authorized to work. Employees with temporary work authorization must also provide their Alien Number (A-Number), USCIS Number, Form I-94 admission number, or foreign passport number and country of issuance, plus the date their employment authorization expires.

Section 2: Employer review and verification. The employer (or an authorized representative acting on the employer's behalf) must complete and sign Section 2 within three business days after the employee's first day of employment. If the employee will work for less than three business days, the employer must complete Section 2 no later than the first day of employment. The employer must physically examine original, unexpired documents presented by the employee from the Lists of Acceptable Documents (or use a DHS-authorized alternative remote-examination procedure if enrolled in E-Verify). The employer records the document title, issuing authority, document number, and expiration date (if any) on the form, then signs an attestation under penalty of perjury that the documentation appears genuine and relates to the employee named, and that to the best of the employer's knowledge the employee is authorized to work in the United States.

## Acceptable documents: List A or the List B + List C combination

Employees choose which documents to present; employers may not specify or require particular documents. List A documents (such as a U.S. passport, Permanent Resident Card, or Employment Authorization Document) establish both identity and employment authorization. Employees who present an acceptable List A document need not present anything further. Alternatively, employees may present one List B document (establishing identity only, such as a state driver's license or U.S. military ID card) and one List C document (establishing employment authorization only, such as a Social Security card or U.S. birth certificate). Employers enrolled in E-Verify who accept a List B + List C combination must ensure the List B document includes a photograph.

## Retention, re-verification, and enforcement

Employers must retain the completed Form I-9 for three years after the date of hire, or one year after employment ends, whichever is later. Forms must be made available for inspection by authorized officials from U.S. Immigration and Customs Enforcement (ICE), the Department of Labor, or the Department of Justice Civil Rights Division. Employers do not file Form I-9 with USCIS or ICE; the form remains in the employer's records.

Re-verification is required when an employee's work authorization expires (indicated by an expiration date in Section 1). The employer completes Supplement B, Reverification and Rehire (formerly Section 3), within the same timing rules. Importantly, lawful permanent resident status does not expire when the green card expires; requesting re-verification of an LPR solely because the card has expired is a document-abuse violation under 8 U.S.C. § 1324b and may expose the employer to anti-discrimination penalties from the Department of Justice Immigrant and Employee Rights Section.

IRCA establishes two distinct violations enforceable by ICE through civil monetary penalties (and, in egregious cases, criminal prosecution). First, knowingly hiring or continuing to employ an individual not authorized to work in the United States violates 8 U.S.C. § 1324a(a)(1)(A) and (a)(2); courts apply a constructive-knowledge standard, meaning an employer who deliberately ignores red flags or obvious warning signs is treated the same as one with direct knowledge. Second, failure to properly complete, retain, or make available Form I-9 — including technical or procedural errors such as missing signatures, blank mandatory fields, or untimely completion — is itself a separate violation under 8 U.S.C. § 1324a(b). When ICE conducts an audit and finds technical or procedural failures, it issues a Notice of Technical or Procedural Failures giving the employer 10 business days to correct; uncorrected errors convert to substantive violations subject to per-form penalties. An employer that complies in good faith with the Form I-9 requirements establishes an affirmative defense to a knowing-hire charge if it turns out the employee was in fact unauthorized, unless the government proves the employer had actual or constructive knowledge.

## E-Verify and federal-contractor mandates

E-Verify is a free, web-based system operated jointly by USCIS and the Social Security Administration that electronically verifies information from Form I-9 against government records. Participation is voluntary for most U.S. employers, but mandatory for federal contractors subject to the Federal Acquisition Regulation E-Verify clause (48 C.F.R. Subpart 22.18) and for employers in certain states (Arizona, Mississippi, and others) that have enacted state-law E-Verify mandates. Employers enrolled in E-Verify must create a case for each new hire within three business days of hire and may, as of August 1, 2023, use an optional alternative procedure to remotely examine Form I-9 documents in lieu of in-person physical examination, provided they retain copies of all documents examined and conduct a live video interaction with the employee.

Source: 8 U.S.C. § 1324a, ICE Form I-9 Inspection Overview, USCIS Form I-9, USCIS I-9 Central, USCIS Handbook for Employers M-274, Section 2.0

A foreign company hiring a remote employee in the United States faces the threshold question: does that employee create a permanent establishment (PE) — a taxable business presence — that subjects the foreign parent to U.S. corporate income tax? The answer turns on whether the foreign enterprise is engaged in a trade or business within the United States and whether that trade or business generates income effectively connected with the U.S. operations, under Internal Revenue Code § 864(c) and, if applicable, the treaty framework codified in bilateral U.S. income-tax treaties following the OECD Model Tax Convention Article 5.

## The Code framework: trade or business and effectively connected income

Under IRC § 864(c)(1)(A), a foreign corporation engaged in a trade or business within the United States during the taxable year is subject to U.S. federal income tax on income, gain, or loss that is effectively connected with the conduct of that trade or business. IRC § 864(c)(3) provides that U.S.-source income (other than certain passive income categories subject to withholding tax under IRC § 881) shall be treated as effectively connected with the conduct of a U.S. trade or business. U.S.-source income includes compensation for services performed in the United States, rents or royalties from property located in the United States, and gains from the sale of U.S. real property interests.

The Code does not define "trade or business within the United States" comprehensively. Courts and regulations apply a facts-and-circumstances standard requiring activities that are continuous, regular, and substantial. Performance of personal services in the United States generally constitutes a U.S. trade or business; a foreign corporation that employs individuals working in the United States may therefore be engaged in a U.S. trade or business through those employees' activities, depending on what they do and how much authority they exercise.

The critical nexus for determining whether income from sources outside the United States is also subject to U.S. tax is an office or other fixed place of business in the United States. IRC § 864(c)(4)(B) provides that foreign-source income will be treated as effectively connected with the conduct of a U.S. trade or business if the foreign corporation has "an office or other fixed place of business within the United States to which such income, gain, or loss is attributable" and the income consists of rents, royalties, dividends, interest, or other specified categories. Treasury Regulation § 1.864-7(b)(2) elaborates: a foreign person is not considered to have an office or other fixed place of business merely because the person uses another's office or fixed place of business (whether or not related) if the foreign corporation's activities in that office are relatively sporadic or infrequent, taking into account the overall needs and conduct of the trade or business. Conversely, if the activities are regular, continuous, and essential to the foreign company's core business, and the office or location is demonstrably "at the disposal" of the foreign enterprise for more than a temporary period, a home office of a U.S.-based employee can constitute a fixed place of business of the foreign employer.

## The treaty overlay: Article 5 permanent establishment

If the foreign corporation is a resident of a country with which the United States has an income-tax treaty, the treaty typically provides a narrower definition of permanent establishment than the Code's "trade or business" concept, potentially shielding the foreign company from U.S. tax even when it would otherwise be engaged in a U.S. trade or business under the Code. Most U.S. tax treaties follow the OECD Model and the U.S. Model Income Tax Convention.

Article 5(1) of the U.S. Model Income Tax Convention (2016) and most bilateral treaties defines a permanent establishment as "a fixed place of business through which the business of an enterprise is wholly or partly carried on." The Technical Explanation to the U.S. Model clarifies that three elements must be satisfied: (1) a place of business (any premises, facilities, or installations used for carrying on business), (2) that is fixed (a particular building or physical location used for more than a temporary duration), and (3) through which the enterprise's business is carried on (the enterprise conducts its operations at that location).

Article 5(4) of the U.S. Model excludes from the PE definition certain activities of a preparatory or auxiliary character, such as:

• The use of facilities solely for the purpose of storage, display, or delivery of goods or merchandise belonging to the enterprise;
• The maintenance of a stock of goods or merchandise belonging to the enterprise solely for storage, display, or delivery, or for processing by another enterprise;
• The maintenance of a fixed place of business solely for purchasing goods or merchandise, or collecting information, for the enterprise;
• The maintenance of a fixed place of business solely for any other activity of a preparatory or auxiliary character for the enterprise.

These exclusions are intended to ensure that only activities that form an essential and significant part of the enterprise's overall business create a PE. Back-office functions, purchasing, or market research conducted by a U.S. employee may fall within the preparatory-or-auxiliary safe harbor, while revenue-generating, client-facing, or contract-negotiation activities generally do not.

Article 5(5) addresses the dependent-agent PE: a foreign enterprise is deemed to have a PE in the United States if a person (other than an independent agent described in Article 5(6)) "has and habitually exercises in [the United States] an authority to conclude contracts that are binding on the enterprise" in respect of activities that constitute the enterprise's essential business. The Technical Explanation states that this rule applies when the agent habitually exercises contract-conclusion authority; a U.S.-based sales employee with authority to negotiate and finalize customer contracts, or who habitually plays the principal role leading to the conclusion of contracts that are routinely executed without material modification by the enterprise, can create a dependent-agent PE even if the employee works from a home office and never sets foot in a company-owned facility.

## Home-office PE: the IRS analytical framework

The IRS International Practice Unit on "Creation of a Permanent Establishment (PE) through the Activities of Employees" examines the scenarios in which secondment of employees or remote work by employees creates a U.S. permanent establishment under treaty Article 5(1). The Practice Unit instructs examiners to consider whether the foreign corporation carries on business through a fixed place of business in the United States, with particular attention to:

1. Whether the enterprise has a place at its disposal (the enterprise has a right to use the location, whether or not it is owned or leased; an employee's home office may be considered at the disposal of the foreign enterprise if the enterprise requires the employee to work from home and does not provide or offer an alternative workspace in the United States).

1. Whether the location is fixed (used on a sustained and regular basis, not merely temporary; the duration depends on the nature of the business — a construction site lasting less than twelve months may not create a PE under most treaties' construction-PE threshold, but an employee working full-time from a home office indefinitely is more likely to be viewed as fixed).

1. Whether the business of the enterprise is carried on at that location (the employee performs core business activities — sales, underwriting, software development, investment management — rather than purely preparatory or auxiliary functions).

The Practice Unit notes that activities limited to preparatory or auxiliary functions do not create a PE under the treaty exceptions in Article 5(4), but that this determination is highly fact-specific. It emphasizes that personnel present in the United States who exercise significant management and control over the foreign enterprise's business operations or investment decisions, or who habitually conclude contracts binding on the foreign enterprise, significantly increase PE risk.

## Practical implications and mitigation

A foreign company hiring a U.S. remote worker should evaluate:

1. What does the worker do? Purely administrative, back-office, IT support, or data-entry roles are more likely to be characterized as preparatory or auxiliary. Sales, business development, contract negotiation, underwriting, investment management, and core R&D for a product are more likely to constitute core business activities that create a PE if conducted through a fixed location in the United States.

1. How much authority does the worker have? Contract-signing authority, pricing discretion, or habitual customer-facing negotiation increases dependent-agent PE risk under Article 5(5).

1. How long and how regular? Treasury Regulation § 1.864-7(b)(2) describes a standard of "relatively sporadic or infrequent" use; by contrast, full-time, indefinite remote employment from a home office in the United States is higher risk. Duration thresholds vary by treaty and fact pattern; the analysis is not mechanical but depends on the nature of the business and whether the use is more than temporary.

1. Treaty vs. Code. A treaty resident may invoke treaty benefits and argue that the activities fall within the preparatory-or-auxiliary carve-out under Article 5(4) or that the home office is not sufficiently "at the disposal" of the foreign enterprise. A foreign company from a non-treaty country (or one that does not qualify for treaty benefits under a limitation-on-benefits article) is subject to the broader Code standard under IRC § 864(c).

1. Entity vs. EOR. Many foreign companies mitigate PE risk by engaging a U.S. Employer of Record (EOR) — a third-party service provider that acts as the legal employer of record, maintains its own U.S. entity, handles payroll and tax withholding, and ensures compliance with U.S. labor and employment laws. The EOR shields the foreign parent from direct PE exposure, provided the foreign parent does not direct the day-to-day activities of the worker in a manner that makes the worker a de facto dependent agent of the foreign parent. Alternatively, the foreign company may establish a U.S. subsidiary or branch, accept the PE, and file U.S. corporate tax returns (Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, for a foreign corporation with effectively connected income).

## Conclusion: the threshold question before any cross-border U.S. hire

Before a foreign company hires its first U.S.-based employee, it must determine whether that employee's activities will create a U.S. permanent establishment. If the answer is yes, the foreign parent must register with the IRS, obtain an Employer Identification Number (EIN), file Form 1120-F annually, and pay U.S. corporate income tax on profits attributable to the PE under IRC § 882. If the answer is no — because the employee's activities are sporadic, preparatory or auxiliary, or the company engages an EOR or establishes a subsidiary — the foreign parent avoids direct U.S. corporate tax but must still ensure compliance with U.S. payroll withholding (Form W-2, federal and state income tax, FICA), wage-and-hour laws, and work-authorization requirements (Form I-9 for U.S.-based hires, as described in the companion section of this guide).

Source: IRC § 864, Treas. Reg. § 1.864-7, U.S. Model Income Tax Convention, Technical Explanation (2016), IRS International Practice Unit: Creation of a Permanent Establishment through the Activities of Employees

A U.S. company paying a contractor — whether the contractor performs services inside or outside the United States — faces a foundational tax-classification question: is the contractor a U.S. person subject to Form 1099 reporting and backup withholding (if applicable), or a foreign person subject to nonresident alien (NRA) withholding under Internal Revenue Code § 1441 and related provisions? The answer determines which tax form the contractor submits (Form W-9 for U.S. persons, Form W-8BEN for nonresident alien individuals, or Form W-8BEN-E for foreign entities), what withholding rate applies (none for most U.S. persons, 30% for most foreign persons unless a tax treaty provides a lower rate), and how the payor reports the payment (Form 1099-NEC for U.S. contractors, Form 1042-S for foreign persons).

A foreign company paying a U.S. contractor faces the inverse question: does the U.S. contractor's status as a U.S. person mean the foreign company has no U.S. withholding obligation on payments for services performed outside the United States (because the income is not U.S.-source), or does the location of performance and the nature of the services trigger U.S. reporting or withholding? This section addresses the W-8 vs. W-9 framework from the perspective of the withholding agent (the payor) and explains the core withholding, documentation, and reporting rules under IRC § 1441 and Treasury regulations.

## The classification fork: U.S. person vs. foreign person

The threshold question is whether the payee is a U.S. person or a foreign person for U.S. federal tax purposes. A U.S. person includes:

• A U.S. citizen (regardless of where they reside);
• A resident alien individual (an individual who is not a U.S. citizen but who meets the green card test — holds a lawful permanent resident card — or the substantial presence test under IRC § 7701(b));
• A domestic corporation, partnership, trust, or estate.

A foreign person (nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate) is any person who does not meet the U.S. person definition. For individual contractors, the key determination is whether the individual is a resident alien (treated as a U.S. person) or a nonresident alien (foreign person).

The substantial presence test under IRC § 7701(b)(3) and Treasury Regulation § 301.7701(b)-1 treats an alien individual as a U.S. resident for tax purposes if the individual is physically present in the United States on at least 31 days during the current calendar year and 183 days during the three-year period that includes the current year and the two immediately preceding years, counting all days in the current year, one-third of the days in the first preceding year, and one-sixth of the days in the second preceding year. An individual who meets the substantial presence test is a resident alien and must submit Form W-9, even if the individual is not a U.S. citizen and does not hold a green card.

Many foreign nationals working in the United States on long-term work visas (H-1B, L-1, O-1, and others) meet the substantial presence test after their first or second year in the United States and therefore become resident aliens for tax purposes; they submit Form W-9, not Form W-8BEN. By contrast, a contractor who is physically outside the United States for the entire year (or is present in the United States only briefly and does not meet the 31-day / 183-day thresholds) remains a nonresident alien and submits Form W-8BEN.

## Form W-9: U.S. person certification and backup withholding

Form W-9, Request for Taxpayer Identification Number and Certification, is the certification that a U.S. person (U.S. citizen, resident alien, domestic corporation, or other domestic entity) provides to a payor to document the payee's U.S. status and furnish the payee's taxpayer identification number (Social Security number or Employer Identification Number). The payor relies on a valid Form W-9 to:

• Confirm that the payee is a U.S. person and therefore not subject to nonresident alien withholding under IRC § 1441;
• Report payments to the payee on Form 1099-NEC (for nonemployee compensation) if the payor is engaged in a trade or business and pays the U.S. contractor $600 or more during the calendar year;
• Apply backup withholding at 24% (the rate in effect for 2024–2026 under IRC § 3406) if the payee fails to furnish a correct TIN, the IRS notifies the payor that the TIN is incorrect, or the payee is subject to backup withholding for prior underreporting.

A properly completed Form W-9 means the payor does not withhold federal income tax from payments to the contractor (unless the contractor is subject to backup withholding for one of the reasons enumerated in IRC § 3406). The payor files Form 1099-NEC annually with the IRS and furnishes a copy to the contractor by January 31 of the year following payment.

## Form W-8BEN: nonresident alien individual certification and chapter 3 withholding

Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), is the certification that a nonresident alien individual provides to a U.S. payor (or other withholding agent) to document the payee's foreign status and, if applicable, claim a reduced rate of withholding or an exemption under a U.S. income tax treaty. The payor relies on a valid Form W-8BEN to:

• Confirm that the payee is a nonresident alien individual (a foreign person) and therefore subject to chapter 3 withholding (also called NRA withholding) under IRC § 1441 on U.S.-source fixed or determinable annual or periodic (FDAP) income;
• Apply the correct withholding rate: 30% under IRC § 1441(a) for U.S.-source FDAP income, or a reduced treaty rate if the payee claims treaty benefits on Part III of Form W-8BEN and provides the treaty country of residence and the applicable treaty article;
• Report the payment and withholding on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, filed annually with the IRS and furnished to the payee by March 15 of the year following payment, and on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, which is the payor's annual return of chapter 3 withholding.

Form W-8BEN is used only for nonresident alien individuals; foreign entities (foreign corporations, foreign partnerships, foreign trusts) use Form W-8BEN-E instead.

A properly completed Form W-8BEN remains valid for the year it is signed and the following three full calendar years, unless a change in circumstances (change of country of residence, change of name, change of address indicating a move to the United States that might trigger the substantial presence test) makes the information on the form incorrect. If a change in circumstances occurs, the payee must submit a new Form W-8BEN within 30 days.

## IRC § 1441: the 30% withholding rule and FDAP income

IRC § 1441(a) requires all persons having the control, receipt, custody, disposal, or payment of any item of fixed or determinable annual or periodic (FDAP) income from sources within the United States paid to a nonresident alien individual or a foreign partnership to deduct and withhold a tax equal to 30% of the gross payment. The term "chapter 3 withholding" (or "NRA withholding") is used by the IRS to refer to withholding required under IRC §§ 1441, 1442, and 1443; Publication 515 (2026), Withholding of Tax on Nonresident Aliens and Foreign Entities, is the IRS's primary guidance document for withholding agents.

FDAP income includes interest (other than certain portfolio interest subject to the exemption under IRC § 871(h)), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other gains, profits, and income. For purposes of nonresident alien contractor payments, FDAP includes compensation for personal services — both employee wages and independent contractor fees — if the services are performed in the United States (U.S.-source income). Compensation for services performed outside the United States is generally foreign-source income and is not subject to chapter 3 withholding under IRC § 1441, unless the payment is effectively connected with the conduct of a U.S. trade or business.

The critical distinction: if a U.S. company pays a nonresident alien contractor for services performed entirely outside the United States, the payment is generally foreign-source income, not subject to chapter 3 withholding, and the U.S. company has no withholding obligation (though it may still request Form W-8BEN to document the contractor's foreign status and the fact that the services were performed outside the United States). By contrast, if a U.S. company pays a nonresident alien contractor for services performed in the United States, the payment is U.S.-source FDAP income subject to 30% withholding under IRC § 1441(a), unless an exemption or reduced rate applies.

## Exceptions to the 30% withholding rate: tax treaties and Form 8233

A nonresident alien individual may claim a reduced rate of withholding or an exemption from withholding on compensation for independent personal services or dependent personal services (wages) if:

1. Treaty benefits. The individual is a resident of a country with which the United States has an income tax treaty, and the treaty contains an article that reduces or eliminates U.S. tax on compensation for personal services. Most U.S. income tax treaties contain a "Dependent Personal Services" or "Income from Employment" article (often Article 14 or 15) and an "Independent Personal Services" article (often Article 14 or 7 in treaties that follow the OECD Model post-2000). These articles typically exempt the individual's compensation from U.S. tax if the individual is present in the United States for fewer than 183 days during the taxable year (or any 12-month period), the compensation is paid by or on behalf of a foreign employer, and the compensation is not borne by a U.S. permanent establishment of the foreign employer.

The IRS publishes a comprehensive set of treaty tables (available at IRS.gov/Individuals/International-Taxpayers/Tax-Treaty-Tables) that show the treaty rates and conditions for personal-service income by country. A nonresident alien individual claiming treaty benefits on compensation for independent personal services (contractor payments) completes Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, and submits the form to the withholding agent before the first payment; the withholding agent reviews the form, accepts or rejects the treaty claim, and forwards a copy of the form (with the withholding agent's acceptance or rejection) to the IRS. If the withholding agent accepts the Form 8233 claim, it withholds at the reduced treaty rate or does not withhold (if the treaty provides a full exemption), and reports the payment on Form 1042-S with the appropriate income code and treaty exemption code.

For dependent personal services (wages paid to a nonresident alien employee), the employee generally uses Form W-4 with special nonresident alien instructions (described in IRS Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens), or submits Form 8233 if claiming a full exemption under a tax treaty. The employer withholds federal income tax at graduated rates (not the flat 30% rate) on wages paid to nonresident alien employees, but applies a special calculation method that does not allow the standard deduction (see Publication 15, Circular E, Employer's Tax Guide, and Publication 515 for the detailed procedure). Wages paid to a nonresident alien that are exempt under a tax treaty are reported on Form 1042-S (not on Form W-2 for the exempt portion, although the employer may also file Form W-2 to report state and local wages and withholding).

1. Services performed outside the United States. If the services are performed entirely outside the United States, the income is foreign-source and not subject to chapter 3 withholding. The payee should submit Form W-8BEN to document foreign status, and the withholding agent should retain documentation (such as an invoice or contract) establishing that the services were performed outside the United States.

## Form 1042-S reporting and the March 15 deadline

A withholding agent that makes a payment of U.S.-source FDAP income to a nonresident alien individual (or other foreign person) subject to chapter 3 withholding — or that makes a payment that would be subject to withholding but for a treaty exemption or reduced rate — must file Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, for each recipient. The withholding agent files Form 1042-S with the IRS and furnishes a copy to the recipient by March 15 of the year following the calendar year of payment. The withholding agent also files Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, by March 15 to report the aggregate amount of payments, withholding, and deposits for the calendar year.

The withholding agent deposits withheld tax to the IRS on a periodic basis (quarterly, monthly, or semiweekly, depending on the amount withheld) using the Electronic Federal Tax Payment System (EFTPS), in the same manner as employment-tax deposits.

## Consequences of misclassification: overwithholding and underwithholding

If a withholding agent collects Form W-9 from a payee who is in fact a nonresident alien (not a resident alien), and the payor files Form 1099-NEC instead of Form 1042-S, the IRS may issue a notice and assess penalties for incorrect information returns. If the payor failed to withhold chapter 3 tax from a payment to a nonresident alien that was subject to withholding, the payor is personally liable for the underwitheld amount under IRC § 1461, plus interest and penalties, even if the foreign payee later satisfies the underlying U.S. tax liability. The withholding agent's liability is independent of the foreign person's liability; the IRS can collect the tax from either party, but will collect only once.

Conversely, if a withholding agent withholds 30% from a payment to a U.S. contractor who should have submitted Form W-9 (because the contractor is a resident alien meeting the substantial presence test, for example), the contractor can file Form 1040-NR (or Form 1040 if treated as a resident alien) and claim a refund of the overwitheld amount, but the error can delay the contractor's receipt of payment and create substantial administrative burden.

## Practical workflow: the documentation step

The best-practice workflow for a company hiring a contractor is:

1. Before the first payment, require the contractor to complete and submit either Form W-9 (if the contractor is a U.S. person) or the appropriate Form W-8 (Form W-8BEN for a nonresident alien individual, Form W-8BEN-E for a foreign entity, Form 8233 if claiming treaty exemption on compensation for independent personal services).

1. Review the documentation. If the contractor submits Form W-9, confirm that the contractor's name and taxpayer identification number are legible and that the contractor signed and dated the form. If the contractor submits Form W-8BEN, confirm that the contractor checked the box certifying nonresident alien status, provided a foreign address (or an explanation if a U.S. address is provided), and completed Part III (treaty benefits) if claiming a reduced rate or exemption.

1. Determine the source of the income. If the contractor is a nonresident alien (Form W-8BEN), determine whether the services will be performed in the United States (U.S.-source, subject to 30% withholding or the treaty rate) or outside the United States (foreign-source, no withholding obligation). Document the determination in the contract or the withholding agent's records.

1. Withhold and report. Withhold tax from each payment at the correct rate (none for Form W-9 recipients, 30% or the treaty rate for Form W-8BEN recipients receiving U.S.-source FDAP income, none for foreign-source payments to Form W-8BEN recipients). File Form 1099-NEC (for Form W-9 recipients) or Form 1042-S (for Form W-8BEN recipients) by the applicable deadline.

1. Retain the documentation. Retain a copy of the Form W-9 or Form W-8BEN (and any supporting documentation, such as Form 8233) for at least three years after the later of (i) the due date of Form 1042 for the year of payment, or (ii) the date Form 1042 was filed.

For foreign companies paying U.S. contractors, the analysis is simpler: if the contractor is a U.S. person (Form W-9) and the services are performed outside the United States, the income is foreign-source and the foreign company has no U.S. withholding or reporting obligation. If the U.S. contractor performs services in the United States for the foreign company, the income is U.S.-source but is paid to a U.S. person; the foreign company may request Form W-9 to document the contractor's U.S. status but generally has no withholding obligation (because chapter 3 withholding applies only to foreign persons, and the contractor is a U.S. person). The foreign company would only have a U.S. reporting obligation if it is engaged in a trade or business in the United States and therefore subject to the Form 1099 reporting rules for U.S. payors; this determination is fact-specific and depends on whether the foreign company has a U.S. permanent establishment or is otherwise engaged in a U.S. trade or business.

## Conclusion: the twin gates of status and source

The W-8BEN vs. W-9 determination is the first gate: is the payee a U.S. person or a foreign person? The second gate is source: is the income from sources within the United States (subject to chapter 3 withholding if the payee is a foreign person) or from sources outside the United States (generally not subject to U.S. withholding)? Cross-border employers must answer both questions before making the first payment to a contractor, retain valid documentation (Form W-9 or the applicable Form W-8), withhold at the correct rate, and file the correct information return (Form 1099-NEC or Form 1042-S). Errors in classification or withholding expose the payor to personal liability for the underwitheld tax, interest, and penalties under IRC § 1461, and can trigger costly remediation and IRS examinations.

Source: IRC § 1441, IRS Publication 515 (2026), Withholding of Tax on Nonresident Aliens and Foreign Entities, IRS Form W-8BEN Instructions, IRS NRA Withholding, IRS Form W-9