Hello, I’m CPA Maximiliano Mira Salas. In this new edition of our weekly newsletter, we address a recurring issue in international operating structures —especially those used by Latin American companies or freelancers in the U.S.—: the outsourcing of professionals or services abroad.

While this is a common practice, it’s important to remember that payments made to international contractors are subject to a specific regime of documentation, withholding, and reporting to the IRS. Lack of awareness or informality in these relationships may result in the loss of tax deductibility, penalties for failure to file informational forms, and even reclassifications by the tax authorities.

🧾 IRS Technical Criteria for Payments to Foreign Contractors

Beneficiary identification as a foreign person: Before making any payment, the company must obtain Form W-8BEN (for individuals) or W-8BEN-E (for entities), duly completed and signed, where the beneficiary declares foreign status and tax residency.
Recommendation: Keep these forms updated and electronically stored, dated prior to the payment.
Evaluation of income source: The IRS distinguishes between U.S.-sourced and foreign-sourced income. If the service was performed outside the U.S., the payment may be considered foreign-sourced and not subject to withholding. If performed within the U.S., the withholding regime applies.
Recommendation: Document the effective location of performance in detail: provider’s address, means used, timeline, etc.
Analysis of applicable Double Taxation Treaty (DTT): If the U.S. maintains a treaty with the contractor’s country of residence, a reduction or exemption from withholding may apply, provided the contractor is the beneficial owner and meets treaty requirements.
Recommendation: Verify the existence of a DTT and evaluate clauses such as business profits, permanent establishment, and principal purpose test.
Compliance with informational forms (e.g., Form 1042 and 1042-S): If the payment is subject to withholding or reporting, Form 1042 (annual) and Form 1042-S must be filed for each foreign beneficiary. Even if no withholding applies, reporting is often required.
Recommendation: Determine before year-end whether reporting is mandatory, and issue Form 1042-S correctly with the applicable income code and withholding rate.
Accounting records aligned with U.S. GAAP and expense substantiation: Beyond the payment itself, supporting documentation is essential: contract, invoice, service acceptance email, payment receipts, deliverables, etc.
Recommendation: Maintain all supporting documents organized, linked to the accounting entry, and available for inspection.

⚠️ Common Mistakes Leading to Tax Risks

Failing to request Form W-8 from the contractor before payment
Wrongly assuming all international payments are exempt
Not filing Forms 1042/1042-S when reporting is required without withholding
Lacking proof of service location
Confusing a foreign contractor with an employee (risk of reclassification)

📌 Legal and Accounting Disclaimer

This communication is for informational purposes only and does not constitute legal or tax advice. Each case must be evaluated individually, considering the taxpayer’s country of residence, global income, and applicable international treaties.

At FINANCERS, we work with internationally operating structures. We assist Latin American companies, professionals, and investors hiring collaborators abroad through U.S.-based structures, ensuring compliance with IRS requirements.

If you have pending payments to foreign contractors or are unsure whether you must report them, you can schedule a technical review with our team.

CPA Maximiliano Mira Salas
International Tax Advisor | FINANCERS 🇦🇷🇺🇸