I have a question about foreign tax reporting concerning vendors we pay in Canada that are similar to vendors we report with 1099s in the U.S., mainly for boxes 6, 7 and 14...

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Q. (cont.) If we are sending money to Canada, does this need to be reported to the IRS? Does a 1042-S need to be filled out? Or only in specific situations? The instructions on the IRS website for reporting foreign vendors is a bit confusing.

A. It depends on the “source” of the income to the recipient. U.S.-source income is subject to reporting and withholding; non-U.S. source income is not subject to reporting and withholding.

Source is determined according to payment type; for example, for nonemployee compensation payments, source is determined by where the work is done. If the contractor performed the work in the U.S., then the payment is U.S.-source; if they performed the work only in Canada, then it is foreign source (no reporting/withholding). If they performed the work in both the U.S. and Canada, you must report the amount allocated to the work done in the U.S.

In the case of rent payments, source is determined by where the property is located; for royalties, source is determined by where the property is used. Transportation depends on start/stop locations, and may require allocation if the start and stop are in different countries. Software is complicated – you have first to determine what kind of payment it is – lease, buy or royalty?

See https://www.irs.gov/publications/p519/ch02.html.

Also see information to help with foreign payments on the AP & P2P Network, under Compliance > 1099/1042-S/W-9/W-8 > 1042-S Reporting for several articles on the subject.

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