Reporting Payments to Independent Contractors: Forms 1099-NEC & 1042-S

For businesses working with independent contractors, understanding tax reporting obligations is essential to staying compliant and avoiding penalties.

Form 1099-NEC and Form 1042-S are critical tools for reporting payments to U.S.-based and foreign contractors, respectively. Whether you're managing contractor payments within the U.S. or navigating international tax requirements, having the right documentation and processes in place can save your business time, money, and headaches.

Below, we break down the requirements for both forms, deadlines, and best practices to keep your business on track.

Form 1099-NEC

Form 1099-NEC is required to be issued if the small business owners or sole proprietors paid at least $600 for services performed by contractors within the calendar year. It reports the amount paid to independent contractors so the recipient can pay taxes on that income on their returns.

In order to prepare Form 1099-NEC, the company needs to request the contractors fill out and sign Form W-9, Request for Taxpayer Identification Number and Certification. The best practice is the company should obtain Form W-9 from contractors when the company starts engaging them to perform the services.

Form W-9 provides the taxpayer information including the full name, address, tax classification, and withholding requirement for contractors. The company needs to keep the signed Form W-9 for record.

If there is no completed W-9 on file, the contractors may be subjected to the backup withholding at 24% from any payments. The company must file Form 1099-NEC for each person who has the backup withholding regardless of the payment amount, and the withholding should be reported in Box 4 of Form 1099-NEC.

The deadline to file Form 1099-NEC is January 31, 2024. If the company fails to file Form 1099-NEC by the due date, the penalty varies from $60 to $310 per form.

Form 1042-S

While Form 1099-NEC is used to report the payments made to U. S.-based independent contractors, Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, is filed to report the amount the U.S. company paid to any foreign persons to perform any services in U.S.

When the U.S. company hires foreign-based independent contractors to work in the U.S., the company has the obligation to withhold tax based on the tax treaty between the U.S. and the payee’s country of residence. If there is no tax treaty in place, the U.S. company needs to withhold 30% tax on any U.S source payments made to foreign independent contractors.

Reporting and filing Form 1042-S can be complicated, and it is required that the U.S. company to have proper documentation on file.

When the U.S. company starts engaging a foreign contractor to perform services in U.S., the best practice is the U.S. company should request the foreign-based independent contractor to complete Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting – Individual or Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting – Entities.

Form W-8 will include all the full name, address, tax classification, and any tax treaty withholding requirement for foreign independent contractors. It is important for the U.S. company to confirm the status of the foreign-based contractor and calculate tax withholding on payments for Form 1042-S. Form W-8 is valid for three calendar years from the signed date.

The filing deadline to file Form 1042-S is March 15, 2024. The U.S. company can file Form 8809, Application for Extension of Time to File Information Returns, to request an extension of time to file Form 1042-S for an additional 30 days. If the company fails to file Form 1042-S by the due date (including the extension), the penalty varies from $60 to $310 per form.

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