What this checklist is
The practical end-to-end compliance workflow for a US company onboarding a global contractor in 2026. For the underlying clauses, see the contractor agreement walkthrough and the SOW walkthrough. For payment plumbing, see how to pay international contractors from the US.
Order matters. Skipping a step is how companies end up with classification challenges 18 months later or year-end 1099 forms nobody can file because TINs are missing.
Step 1. Classify the worker
The IRS applies a common-law test built on three categories: behavioral control, financial control, and the type of relationship (IRS).
Behavioral control. Does the company direct how the work is done, when, and where? The more behavioral control, the more it looks like employment.
Financial control. Does the worker have other clients, set their own rates, invest in their own tools, and bear profit-or-loss risk? Exclusive engagement at a fixed rate looks more like an employee.
Type of relationship. Is there a written agreement? Is the work core or peripheral to the business? An indefinite engagement performing a core function is hard to defend as independent contracting.
No single factor decides. The Department of Labor’s 2024 economic reality rule looks at six factors under the FLSA. California’s AB5 applies a stricter three-part ABC test.
Short self-audit:
- Will the worker set their own schedule and methods?
- Will the worker have other clients during the engagement?
- Will the worker provide their own equipment?
- Is the engagement tied to a defined project with an end?
- Is the work peripheral to the company’s core business?
If three or more answer “no”, the worker probably is not a contractor. Restructure the engagement or hire as an employee, possibly through an Employer of Record.
Step 2. Collect the tax form before the first payment
The tax form is the second gate. Which form depends on who the contractor is.
US person (individual or entity), file Form W-9. Form W-9 collects the contractor’s name, business name if different, address, and Taxpayer Identification Number (TIN). The payer uses the TIN to issue a 1099-NEC at year end. Without a valid W-9, the payer must do backup withholding at 24 percent under IRC section 3406.
Foreign individual, file Form W-8BEN. Form W-8BEN certifies that the contractor is a foreign person and the beneficial owner of the income. It also lets the contractor claim a reduced rate of withholding under an applicable income tax treaty. The form is signed under penalties of perjury and is generally valid through the last day of the third succeeding calendar year (IRS instructions).
Foreign entity, file Form W-8BEN-E. The entity version of W-8BEN. It is more complex, includes a Chapter 4 (FATCA) classification block, and is required from foreign corporations, partnerships, and similar entities. The same validity rules apply.
For the broader question of when withholding actually applies, the rule of thumb is that services performed entirely outside the United States by a nonresident alien are foreign-source income, which is generally not subject to US withholding or 1042-S reporting. A signed W-8 still must be on file as documentation of foreign status. The full walkthrough is in the international contractor payments guide.
Practical rule: never release the first payment before the tax form is signed, dated, and in the file. Once the contractor has been paid, getting them to send the form back is harder than it should be.
Step 3. Verify identity and run any required KYC
Federal law does not require a US company to KYC every contractor it engages, but several reasons push toward doing it anyway.
The tax form is signed under penalties of perjury. The payer must have a reasonable basis for treating the W-8 or W-9 as valid. If the name on the form does not match the name on a government ID, you have a problem.
The payment rail will require its own KYC layer. Stripe, Wise, banks, and remittance providers each run their own identity verification before they will route funds, and the verification often takes longer than founders expect. Starting early is cheaper than waiting.
For higher-risk jurisdictions, some companies layer in OFAC sanctions screening, particularly when paying into countries on the SDN list (see OFAC sanctions programs). For most engagements, this is a quick automated check.
For foreign individuals, collect a copy of government ID (passport is cleanest) at onboarding. For foreign entities, collect a certificate of incorporation, registered address, and basic ownership information. Hold these records under the same retention rules as the tax form.
Step 4. Sign the master agreement and the first SOW
With classification confirmed and the tax form on file, sign the contractual documents. The clean structure is two layers:
A Master Services Agreement. Sets out the legal frame: IP ownership (with the 17 USC 101 work-for-hire reference and the present-assignment backup), confidentiality, indemnification, classification language, taxes, termination, and electronic-signature consent under 15 USC 7001. The contractor agreement walkthrough covers each clause.
A Statement of Work. The operational frame for the specific engagement: scope, deliverables, acceptance criteria, milestones, fees, change-order process. The SOW walkthrough covers this in detail.
Sign electronically, retain the executed PDFs, and store them alongside the tax form and KYC records. The audit trail is what proves the engagement was legitimate if a classification challenge happens later.
If the engagement involves regulated data (health, financial, or personal data covered by GDPR, HIPAA, or similar), add a Data Processing Agreement (DPA) as an exhibit at this stage. Retrofitting a DPA after a breach is significantly more expensive.
Step 5. Set up the payment rail
Pick a payment method and onboard the contractor onto it before the first invoice. Options for global contractor payments include:
- Wire transfer (SWIFT). Universal, slower, more expensive, includes intermediary bank fees. Best for one-off larger payments.
- ACH (US contractors only). Cheap and fast, restricted to US bank accounts.
- Local payment networks. Networks that route US dollars into local currency in the contractor’s country (UPI in India, SEPA in the EU, FAST in Singapore). Faster and cheaper than SWIFT.
- Card payouts. Possible through some providers but rarely the best option for contractor payments because of fees.
Collect bank details (or wallet details where applicable), verify them through a small test transaction or the provider’s verification flow, and set up the recurring payment schedule. The contractor agreement should already specify currency, payment cadence, and who bears bank fees, the operational setup just executes those terms.
For US companies, two practical issues come up:
FX markups. Some platforms quote a low headline fee but apply a 1 to 3 percent FX markup. Compare on the all-in cost, not the headline rate.
Compliance with the contractor’s local rules. Some countries require contractors to receive payment into specific account types or to register the inbound payment with a central bank. The contractor is usually responsible for compliance on the receiving side, but it helps to ask before the first payment.
Step 6. Track the year, file 1099-NEC or 1042-S
The year-end filing depends on who the contractor is and where the work was done.
US contractor paid $2,000 or more during the year, file Form 1099-NEC. The reporting threshold for nonemployee compensation rose to $2,000 for payments made after December 31, 2025, under the One Big Beautiful Bill Act. The previous threshold was $600. The form is filed with the IRS and furnished to the contractor by January 31 of the following year (or the next business day if that date is a weekend, see IRS Form 1099-NEC).
Foreign contractor with US-source income subject to withholding, file Form 1042-S. Form 1042-S reports income paid to foreign persons that is subject to US withholding. The form is filed with the IRS and furnished to the recipient by March 15 of the following year. The default withholding rate is 30 percent, reduced under any applicable tax treaty claimed on the W-8.
Foreign contractor performing services entirely outside the US, generally no US information return. Services performed by a nonresident alien outside the United States are foreign-source income under IRC section 861 and are not subject to US withholding or 1042-S reporting. The W-8 should be on file as documentation of foreign status.
A common operational mistake is to assume that because the contractor is foreign, no filing is needed. The right question is where the services were performed. If the services were performed in the US, even briefly, US-source rules can apply.
For the deeper walkthrough of source rules and treaty claims, see the international contractor payments guide.
Step 7. Maintain records
Keep everything. The IRS recommends keeping employment and contractor tax records for at least four years after the tax is due or paid, whichever is later (IRS recordkeeping guidance). State labor laws often require longer retention. The practical default is seven years from the end of the engagement.
The records to keep:
- Signed MSA, SOW, and all change orders
- Tax form (W-9, W-8BEN, or W-8BEN-E) with date received
- KYC documents (government ID, certificate of incorporation)
- All invoices and proof of payment
- Year-end 1099-NEC or 1042-S forms, if filed
- Any change-of-circumstance updates the contractor sent during the engagement
Store these in a structured way, not in someone’s email. When a classification challenge or audit comes, the company that can pull the full file in five minutes is in materially better shape than the one that has to reconstruct it.
The whole checklist in one place
- Classify. Run the IRS common-law test, FLSA economic reality factors, and state-law tests where applicable. If the worker is borderline, restructure the engagement or hire as an employee.
- Tax form. Collect W-9 (US), W-8BEN (foreign individual), or W-8BEN-E (foreign entity) before the first payment.
- Identity verification. Collect government ID for individuals and certificate of incorporation for entities. Run OFAC screening for higher-risk jurisdictions.
- Sign MSA and SOW. With IP, confidentiality, classification, tax, and ESIGN language in the MSA, scope and acceptance in the SOW.
- Payment setup. Pick the rail, onboard the contractor, verify the account, set the cadence.
- Track and file. 1099-NEC by January 31 for US contractors at or above $2,000, 1042-S by March 15 for foreign contractors with US-source withholding.
- Records. Hold all documents for at least four years (IRS) and ideally seven years.
When the workflow breaks at scale
Two contractors is manageable. Twenty spread across India, the Philippines, Brazil, and Eastern Europe with rolling onboarding, rotating SOWs, and different payment rails is not. Tax forms expire silently (W-8BEN is good for three calendar years), year-end filings miss contractors who moved off, and the audit trail dissolves.
Omnivoo Contract Management runs the seven-step workflow as one product. Tax form picked automatically based on residency, agreement and SOW generated, e-signature flow run, payment rail set up, year-end filings produced from the same data. Flat $49 per contract, payment fees at cost.
If volume is small, the checklist works. Otherwise, soft pitch.