Every January a US company with people in India asks the same question, and the commonest answers given are both wrong: “send them a 1099” and “they’re foreign, so nothing is needed.” The first creates a filing that should not exist. The second skips a document you are supposed to hold.
A foreign person performing services entirely outside the United States generally receives no Form 1099 and no Form 1042-S, and no US withholding applies — because the income is foreign-source under IRC §861(a)(3). What you do need is a signed Form W-8BEN on file. Without it, presumption rules can force you to treat the payee as a US person, triggering 1099 reporting and 24% backup withholding.
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Quick Summary
| Who they are, where the work is done | Form | Withholding |
| US citizen or resident, anywhere | 1099-NEC if over threshold and not a corporation | None, if documented |
| Foreign person, all work outside the US | None — hold a W-8BEN | None |
| Foreign person, work performed in the US | 1042-S, with Form 1042 annual return | 30% unless a narrow exemption applies |
| Foreign person, work partly in the US | Allocate; 1042-S on the US-source portion | 30% on the US-source portion |
| Foreign payee with no valid W-8 on file | 1099 under presumption rules | 24% backup withholding |
| Employee of your Indian subsidiary or EOR | Indian payslip and salary TDS | India-side withholding, not US |
💡 TaxKitab Tip Collect the W-8BEN before the first payment, not at year end. A W-8BEN is generally valid through the end of the third calendar year after it is signed, so one form covers three years of payments — but it cannot be applied retrospectively to fix a payment you have already made without documentation. Put it in the onboarding checklist alongside the bank details. It takes the contractor five minutes and removes the entire backup-withholding question.
Why Sourcing, Not Nationality, Decides It
The rule that settles most of this is the source rule for personal services income. Compensation is sourced to where the services are physically performed — IRC §861(a)(3) for US-source and §862(a)(3) for foreign-source.
What does not decide it: citizenship, your company’s location, which bank account pays, the governing law, or the currency.
So a developer in Pune working for a Delaware company earns foreign-source income. No US tax, no withholding, no Form 1099 — because the 1099 series reports payments to US persons and 1042-S reports US-source payments to foreign persons. A foreign person with foreign-source income falls outside both.
The W-8BEN Is the Point
What you must do is document that the payee is a foreign person. That is Form W-8BEN for an individual and W-8BEN-E for an entity.
It is not filed with the IRS — you hold it. Its job is to establish, if anyone asks later, that you had a basis for not reporting and not withholding.
Without it, the presumption rules in Treasury Regulation §1.6049-5(d)(2) can require you to presume the payee is a US person: 1099 reporting plus 24% backup withholding under §3406. If you did not withhold, the payer can be liable for the tax under IRC §1461, and gross-up rules can make that liability larger than the original tax.
Attaching a short signed statement that no services were performed in the United States costs nothing and answers the one question the W-8BEN does not.
The Threshold Changed — and It Is Mostly a Distraction Here
The 1099-NEC and 1099-MISC reporting threshold rose from $600 to $2,000 for tax year 2026 under the One Big Beautiful Bill Act, with inflation indexing from 2027, and the 1099-K threshold reverts to $20,000 and 200 transactions.
For India-based contractors this is beside the point. The question is not whether you crossed a threshold but whether a 1099 applies at all, and for a documented foreign person working abroad it does not. The threshold matters for your US contractors.
When It Does Become US-Source
Three situations move a payment into 1042-S and withholding territory.
The contractor does some of the work in the US. Compensation is allocated, time-based by default under Treasury Regulation §1.861-4(b): a $200,000 contract with 30 of 200 working days in the US produces $30,000 of US-source income. You need contemporaneous day records, and a fixed-fee contract needs a split documented before the work starts.
Part of the payment is a royalty. Where the contract licenses copyright rights rather than assigning them, that portion is sourced to where the IP is used under §861(a)(4) — and can be US-source even when all the work was done in India. On a software development contract, the IP clause changes the tax answer.
Treaty claims work differently for services. A W-8BEN does not claim a treaty exemption for personal services performed in the US. That runs through Form 8233, which requires a US TIN, is given to the withholding agent, forwarded to the IRS within five days, and cannot be honoured for at least ten days. A treaty claim on a royalty does go on the W-8BEN, with the payment still reported on 1042-S at the reduced rate.
What About W-2?
A W-2 is for employees of the US entity. An India-based person is normally either an independent contractor of the US company or an employee of your Indian subsidiary or an EOR — in which case they are on an Indian payslip with Indian salary TDS and no US form applies at all.
If you are wondering whether to put an India-based person on a W-2, the real question is which structure you are in: who files what, and where, for a US company with an India team, with the India-side classification risk in contractor versus employee in India.
The India Side of the Same Payment
The contractor declares the income in India and pays tax on it. If their turnover crosses the GST registration threshold they register, and an export of services to a US client is zero-rated subject to conditions including receipt in convertible foreign exchange.
Where you pay through an Indian entity rather than directly, withholding on professional and contractor payments now sits in Section 393 of the Income-tax Act, 2025, which consolidates the old 194-series into one section with a payment-code table, effective 1 April 2026. What were Sections 194J and 194C now carry codes under that table — the wider renumbering is in what changed in the Income Tax Act 2025.
How We Work on This
We handle the India side — contractor and payroll records, withholding under the 2025 Act, GST position on exported services, and the documentation that supports it.
US form determinations, 1042 filings and anything before the IRS sit with our US partner, an IRS Enrolled Agent, under a separate engagement with you.
Frequently Asked Questions
Do I send a 1099 to an Indian contractor? Generally no, where the work is done entirely outside the US and you hold a W-8BEN. Issuing one anyway creates a reporting record that says the payee is a US person, which is not a harmless error.
What if my Indian contractor refuses to sign a W-8BEN? Then you have no documentation of foreign status, and the presumption rules point towards treating them as a US person, with 24% backup withholding. Most refusals are a comprehension problem rather than a real objection — the form asks for no US tax number for this purpose.
How long is a W-8BEN valid? Generally through the end of the third calendar year after signing, unless circumstances change. A change of address or status means a fresh form.
Is a W-8BEN-E needed if they bill through a company? Yes. Individuals use W-8BEN, entities W-8BEN-E, and the entity version asks about classification.
Work happened in the US and I have no day records? Reconstruct from travel records and project notes, and start recording days now. The default allocation is time-based, and without records you negotiate from a weak position.
Does the India–US treaty help my contractor? It can, on the India side, where income has been taxed in both countries — relief runs through Article 25 and is claimed in India under the domestic credit mechanism. For services performed wholly in India there is normally no US tax to relieve in the first place.
References
- Internal Revenue Code §861(a)(3), §862(a)(3) — source of personal services income; §861(a)(4) — royalties; §1441 — withholding on US-source income; §1461 — payer liability; §3406 — backup withholding
- Treasury Regulation §1.861-4(b) — allocation of compensation; §1.6049-5(d)(2) — presumption rules; §1.1441-4(b) — narrow exemptions for personal services
- Forms W-8BEN, W-8BEN-E, 8233, 1042, 1042-S, 1099-NEC
- One Big Beautiful Bill Act — 1099-NEC and 1099-MISC threshold raised to $2,000 for tax year 2026, inflation-indexed from 2027; 1099-K threshold restored to $20,000 and 200 transactions
- Income-tax Act, 2025, Section 393 — consolidated non-salary TDS provisions, effective 1 April 2026
⚠️ Section 393’s payment codes and sub-clause references are new and secondary sources are not yet consistent on them. Confirm the code and rate on incometax.gov.in before applying it, and confirm any US form determination with your US adviser rather than from this table.
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