Paying International Contractors: FAQs

Generally no - Form 1099-NEC is generally not required for foreign contractors who perform all their work outside the United States, per IRS guidance. Instead, collect a Form W-8BEN from the contractor before the first payment.

Form W-8BEN is the IRS form a foreign contractor submits to certify their foreign status (and claim any applicable tax treaty benefit). It must be collected before the first payment and is valid for 3 calendar years from the date signed. Without a valid W-8BEN on file, you may be required to withhold US tax on the payment.

Under India's FEMA (Foreign Exchange Management Act), export-of-services payments to India-based contractors must clear RBI-authorized banking channels, generally within 9 months of invoicing. Companies must retain invoices, contracts, bank advices, and e-FIRA records for a minimum of 5 years.

The Economic Reality Test - used by the IRS, DOL, and most state labor agencies - looks at the totality of the relationship rather than the contract label. Key factors: behavioral control (does the company control how the work is done?), financial control (who bears investment/profit-loss risk?), and the relationship's permanence and integration into the business.

A common trigger is time-based: if a contractor has worked exclusively for you for 6+ months with no end date in sight, misclassification risk becomes material. In India specifically, the EPF Organisation can audit contractor arrangements and reclassify workers as employees, triggering backdated PF contributions, penalties, and interest.