The question that actually matters
A US founder pays a designer in Lisbon and a tax accountant asks the dreaded question: did you withhold 30%? The honest answer for most US companies paying foreign contractors is that no withholding was required, but you only know that once you have run the right test. Guess wrong in the other direction and you have under-withheld on a real US tax obligation, with the liability landing on you, the payer.
This guide walks the 30% NRA withholding rule the way it actually applies to contractor payments. The default rule sounds scary. The way it usually resolves for offshore work is reassuring. The piece in the middle, the part that decides which way it goes, is source of income.
A note before we start. This is general information, not tax or legal advice. Withholding outcomes turn on the facts of your situation, so confirm the specifics with a qualified tax professional before you pay.
The default rule: 30% on US-source income
Start with the rule the IRS leads with. Per the IRS NRA withholding page, “Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%.” Publication 515 says the same thing: “In most cases, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%.”
The IRS defines the regime plainly. Per the NRA withholding page, “NRA withholding describes the withholding regime that requires 30% withholding on a payment of U.S. source income and the filing of Form 1042 and related Form 1042-S.” NRA stands for nonresident alien, and that is who this applies to: a foreign person, not a US citizen or resident.
Two words in that rule do all the work: U.S. source. The 30% is not a tax on foreign contractors as a class. It is a tax on US-source income paid to them. So the whole question collapses to one thing: is the payment US-source or not? See NRA withholding for the full definition.
Source is decided by where the work is performed
For payments to contractors, the income at issue is personal service income, and the sourcing rule for it is unusually clean. Per the IRS source-of-income rule for personal services: “The place, where the personal services are performed, generally determines the source of the personal service income, regardless of where the contract was made, or the place of payment, or the residence of the payer.”
Read that last clause twice, because it kills the three assumptions US founders usually make. It does not matter that the contract was signed under US law. It does not matter that you pay from a US bank account in US dollars. It does not matter that you, the payer, are a US company. The only thing that matters is where the contractor sat while doing the work. See source of income rules for more.
That single rule splits every contractor relationship into two cases.
Case one: work performed entirely outside the US
A contractor in Manila, Buenos Aires, or Lisbon who does all the work from there is earning foreign-source income. Their income is not US-source, so the 30% NRA rule does not reach it.
In practice that means the payment is generally not subject to 30% NRA withholding and is generally not reported on Form 1042-S, because Form 1042-S reports US-source income. The job of documentation here is to prove the contractor is foreign so you are not treating them as a US payee by default. That is what a valid Form W-8BEN does for an individual, and a W-8BEN-E for a foreign entity. The contractor gives the form to you, the withholding agent, and you keep it on file before the first payment. Per the IRS W-8BEN instructions, “Do not send Form W-8BEN to the IRS. Instead, give it to your withholding agent.”
This is the case most US companies are actually in. You hired offshore talent who work from their own country. The 30% does not apply because the income is not US-source. But you still need the W-8BEN on file to support that position, and our how to collect a W-8BEN from foreign contractors guide walks the full process.
Case two: work performed inside the US
Now the same contractor flies to your office for a two-week sprint, or a foreign consultant runs a workshop on US soil. The portion of the work performed inside the United States is US-source income, and the 30% NRA rule is in play for that portion.
US-source service income paid to a nonresident alien is generally FDAP income, fixed, determinable, annual, or periodical income, which is the category the 30% flat rate attaches to. Per Publication 515, this kind of US-source income is generally subject to US tax of 30%. As the payer you are the withholding agent, so the obligation to withhold and remit sits with you, and you report it on Form 1042-S with the annual Form 1042 return.
There are two important softeners on that 30%.
A tax treaty can reduce or eliminate it. Per Publication 515, “A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person’s country of residence and the United States.” To claim it, the contractor has to give you a W-8BEN that includes a taxpayer identification number, an SSN or ITIN or a foreign TIN, plus the treaty country and article completed in Part II. A blank Part II is no treaty claim, so the full 30% applies.
Effectively connected income is treated differently. If the contractor’s US activity rises to a US trade or business, the income can be effectively connected income, or ECI. ECI is generally taxed at graduated rates on a net basis rather than the flat 30% FDAP rate, and a contractor claiming it gives you a Form W-8ECI instead of a W-8BEN. The line between FDAP and ECI is fact-specific, so get advice on any meaningful in-US work before you pay.
FDAP versus ECI, in one paragraph
You do not need to master this distinction to pay an offshore contractor, but you should recognize the two buckets. FDAP is the passive-style, flat 30% bucket that covers most US-source service payments to a nonresident alien who is not running a US business. ECI is the active-business bucket, taxed on a net basis at graduated rates, with its own form and its own logic. Both only matter once income is US-source in the first place. If the work happened abroad, you never reach this fork.
A decision checklist for one payment
Run these four questions for each foreign contractor before you release a payment.
- Is the contractor a foreign person? A US citizen, green-card holder, or US resident is a US person who gives you a Form W-9, not a W-8BEN, no matter where they live. If they are foreign, continue.
- Where was the work physically performed? All outside the US points to foreign-source. Any inside the US points to US-source for that portion. This is the question that decides the outcome.
- If any work was in the US, does a treaty apply? Check whether the contractor’s country has a US tax treaty and whether they have given you a W-8BEN with a TIN and a completed Part II. No completed Part II means the default 30% applies to the US-source portion.
- Is the right documentation on file? A valid W-8BEN or W-8BEN-E for foreign status, collected before the first payment and not expired.
A short worked example. You pay a Brazilian developer 5,000 dollars a month and all the work is done from São Paulo. Step two resolves it: the work is entirely outside the US, so the income is foreign-source, there is no 30% NRA withholding, and the payment is generally not reported on Form 1042-S. You keep the W-8BEN on file and that is the position documented. If that same developer spent two weeks of one month physically working from your New York office, the pay attributable to those two weeks becomes US-source, and the 30% rule turns on for that slice unless the US-Brazil position reduces it.
Why the payer carries the risk
The reason this matters more for you than for the contractor is simple. NRA withholding is the payer’s job. As the withholding agent, you are the one the IRS holds responsible for getting it right. Under-withhold on genuinely US-source income and the unpaid tax can become your liability, not the contractor’s. Over-withhold on foreign-source income and you have taken 30% out of a payment that never owed it, which is a fast way to lose a good contractor.
That is why the W-8BEN and the source question are not paperwork for paperwork’s sake. They are the record that proves you applied the rule correctly. Work through your own contractor with our free W-8BEN collection checklist, which walks the same source-of-income step with the IRS citations attached.
When a platform runs the test for you
A US founder paying one offshore contractor can run this checklist by hand. A US team paying ten contractors across six countries is tracking ten W-8BENs, ten expiry dates, ten source positions, and the occasional treaty claim, and that is where the manual approach starts to leak.
Omnivoo Contract Management handles it for a flat $49 per contract. We collect the right form, W-8BEN for individuals and W-8BEN-E for entities, run the KYC, draft and manage the contract, track renewal dates, and pay your contractors in 150+ countries, end to end. Transaction fees are passed through at cost, with no FX markup and no subscription.
The short version
US-source income paid to a foreign contractor is generally taxed at 30%, and you are the one who has to withhold it. But for personal services, source follows where the work is performed. Work done entirely abroad is foreign-source, so the 30% generally does not apply and there is no Form 1042-S. Work done inside the US is US-source and may be subject to the 30%, possibly reduced by a treaty, with Form 1042-S reporting. Collect a valid W-8BEN, answer the source question honestly, and you have the position documented.
Want to skip the assembly entirely? See how Omnivoo Contract Management handles foreign contractors end to end, or talk to our team about your specific setup.