We have a new vendor, a law firm in Puerto Rico, that has supplied us with a W-81MY and has an EIN. All work is done in Puerto Rico. Would they fall under the 1042 umbrella and not be reportable as foreign sourced income?


The following is our assessment of the situation, and the principles have been confirmed by a tax expert at Cokala. However, neither the Ask the Expert Team nor the staff of The Accounts Payable Network are tax attorneys and the following is only our opinion. Correct withholding and reporting of payments depends on the particular circumstances and status of the transaction and payee. We recommend you verify with your tax attorney.

You are on target regarding payments to an entity (as opposed to an individual) in Puerto Rico being in the 1042-S camp. However, in dealing with vendors or contractors in Puerto Rico, your reporting requirements vary. If you are doing business with a Puerto Rican national (an individual, not an entity), then you need to obtain a W-9 because Puerto Rican nationals are U.S. citizens under the Jones Act. Payments to them, regardless of where the work is done, are reported on a 1099-MISC. However, businesses formed under Puerto Rican law are considered foreign corporations and are subject to the rules of foreign reporting, meaning you want a W-8 instead of a W-9, and may have 1042-S reporting.

In this case, though, you say the law firm supplied a W-8IMY—that is the W-8 for an intermediary, probably because the law firm is a partnership, not a corporation. A W-8IMY indicates that the law firm is not the beneficial owner—either it is an agent for the beneficial owner, or as suggested, because the firm is structured as a partnership, in which case the individual partners are the beneficial owners.

When you receive a W-8IMY, you should request information on the beneficial owners and a withholding statement. If the beneficial owners are Puerto Rican individuals, then as U.S. citizens they should supply forms W-9 and will have SSNs. You also need a withholding statement from the firm that specifies how to allocate the payment among reportable beneficial owners. And you will have to report the payments on form 1099-MISC, with allocations according to the withholding statement.

If any or all the beneficial owners are foreign, then you are back to 1042-S reporting, and as the payment is not U.S.-source income, then no withholding/reporting is required for the foreign beneficial owner.

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