1099s for Foreign Contractors & Americans Abroad
As an expat business owner or freelancer living abroad, you may need to deal with IRS Form 1099. Form 1099 is a crucial tax document used to report payments made to independent contractors. If you’re an independent contractor, your payer will fill out and send you a copy of this form, which you’ll then use to report your self-employment income on your individual tax return.
If that sounds complicated, don’t worry. We’re here to clear up any confusion you may have. Here’s what you need to know about 1099s for US citizens living abroad.
- Form 1099 is used to report payments made to an independent contractor.
- Expat business owners may need to file Form 1099 when working with contractors abroad.
- Failing to file Form 1099 as required could result in penalties.
Form 1099-NEC and Independent Contractors
There are several versions of Form 1099, each used to report a different type of income. In this case, we’re referring specifically to Form 1099-NEC (Non-Employee Compensation)—which is what people usually mean when they refer to Form 1099.
Form 1099-NEC is used to report payments made to an independent contractor. Independent contractors are self-employed workers who offer professional services to clients. They are not employees. Other terms for an independent contractor include:
- Self-employed worker
- 1099 contractor
Do You Have to Send Form 1099 to a Foreign Contractor?
You will have to issue Form 1099 to an independent contractor if you have paid them at least $600 in a single year AND either of the following is true:
- The independent contractor is considered a US person
- The independent contractor is not a US person but performed at least part of their services within the US.
Conversely, if the independent contractor is not a US person and did not perform any of their services within the US, you will not be required to issue Form 1099. Instead, the foreign contractor will have to complete and file Form W-8BEN.
1099s for US Contractors Abroad
If you are a US contractor living overseas, you will not have to file Form 1099. Instead, you may receive a completed Form 1099 from clients who paid you at least $600 over the course of a year. You will then use these forms to report your worldwide income on your US tax return.
Foreign clients may not be required to send you a Form 1099. In that case, you will be responsible for tracking your own income so you can report it accurately on your US taxes.
As an expat, it is important to keep in mind that the IRS provides several tax benefits for US citizens living abroad, such as:
Using these tax breaks, you can reduce what you owe in US taxes—or erase your US tax bill entirely.
Form 1099 Deadlines and Penalties
If you are required to file Form 1099, you will typically have to send it to the independent contractor and the IRS by January 31. Failing to file Form 1099 on time may result in severe penalties.
- If you file within 30 days after the deadline, the standard penalty is $50 per late form. The maximum penalty is $588,500 ($206,000 for small businesses).
- If you file more than 30 days after the deadline but before August 1, the standard deadline is $110 per late form. The maximum penalty is $1,766,000 ($588,500 for small businesses).
- If you file later than August 1, the standard penalty is $280 per form. The maximum penalty is $3,532,500 ($1,177,500 for small businesses).
The SSA (Social Security Administration) considers a small business to be any business that has made $5 million or less in average annual revenues for the last three tax years.
The above penalties apply only to unintentional failure to file. If the IRS believes that you intentionally refused to file, the penalty is $570 per form—with no maximum penalty.
Employees Abroad vs. Contractors
According to the IRS: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” This is in contrast to employees, who work under the full control and direction of their employer.
There are quite a few differences between the tax obligations of an employer versus a client working with an independent contractor. Most importantly for this post, employers do not have to file Form 1099 to report payments made to an employee. Instead, an employer must file IRS Form W-2. Form 1099 is only used to report payments made to an independent contractor.
There are also important distinctions between how independent contractors and employees file taxes while living overseas. Independent contractors must report their self-employment income and pay the US self-employment tax. Employees will report their salary and pay only the employee portion of the US Social Security and Medicare tax on their business profits. Employees will report their salary and might have to pay only the employee portion of the US Social Security and Medicare tax.
Let’s look at a couple of examples of contractor and employee taxes for Americans working abroad.
Example #1: Paying Expat Taxes as a Contractor Abroad
US expats will have to be compliant with the host country’s income tax (if applicable) and also US income tax because the US taxes all US citizens or Green Card holders (legal permanent residents) on worldwide income.
For example, let’s say John Expat contracts overseas and earns $60,000 of net self-employment income during the year. John is a resident in Dubai from January 1–July 31 of the tax year and in Singapore from August 1–December 31 of the tax year. For the $35,000 ($60,000 x 7/12) earned while resident in Dubai, John will be subject to no income tax in Dubai. Since John is resident in Singapore for less than 183 days in the year, $25,000 ($60,000 x 5/12) earned while in Singapore is subject to a 15% flat non-resident tax rate. Therefore, the tax payable in Singapore will be $3,750.
Using the FEIE, John is able to exclude the entire $60,000 of his net self-employment income from taxation. However, John’s self-employment income is still subject to the US self-employment tax. This is because the FEIE can be used to exclude income from income tax but cannot be used to exclude income from the self-employment tax.
The typical formula for the self-employment tax is 15.3% of 92.35% of the individual’s income. In John’s case, he will pay 15.3% of ($60,000 x 92.35%). This comes to $8,478. Thus, John’s total tax liability for the year would be $12,228 ($3,750 of Singapore tax, plus $8,478 of US self-employment tax).
Example #2: Paying Expat Taxes as an Employee Abroad
Consider the same example as above, but now, John is an employee of a foreign company. In this case, John can exclude the full $60,000 of his salary from US taxation using the FEIE. And because he is an employee, he is not subject to the US self-employment tax. (And expats employed by a foreign employer are generally not subject to US Social Security and Medicare taxes, either). Thus, John has no US tax liability and only owes the Singaporean tax of $3,750.
How to File Form 1099
1. Gather Information
To file Form 1099, start by gathering the information you will need to fill in. This will include:
- Your name, address, and phone number
- Your Taxpayer Identification Number (TIN)
- The independent contractor’s name, address, and phone number
- The independent contractor’s TIN
- The total amount you paid the independent contractor during the tax year
- Any taxes withheld from your payments
2. Fill Out Form 1099
Once you have the information you need on hand, it’s time to fill out the form—or rather, forms. There are two copies of every Form 1099-NEC: Copy A and Copy B. You will complete both copies with the same information.
3. Submit Form 1099
After you’ve completed both copies of Form 1099, submit Copy A to the IRS and Copy B to the independent contractor. When submitting Copy A to the IRS, you can file it electronically or by mail. Both copies (A and B) are due by January 31, regardless of which method you use. Electronic filing is highly recommended.
If you can’t make the January 31 deadline for Form 1099, you can request a 30-day extension by filing IRS Form 8809. However, this extension is not automatic. You will have to explain why you cannot reasonably file on time.
4. Submit Form 1096 (If Applicable)
If you file a physical copy of Form 1099 with the IRS, you must also complete and file Form 1096. The IRS uses this form to track any physical 1099s you file in a given year.
5. Repeat (If Necessary)
If you have multiple independent contractors who meet the standards for Form 1099, you will need to complete and file a separate Form 1099 for each one.
To learn more, see the instructions for Form 1099-NEC provided on the IRS website.
Get Expert Help with Your 1099s as a US Citizen Abroad
We hope this guide has helped you understand when (and how) you should file Form 1099 as a US citizen abroad. Still have questions? We have answers! In fact, we can even prepare and file your expat taxes on your behalf.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.