How do I deduct expenses for paying an affiliate marketer in a foreign country if no 1099s are issued?

[joe-87]

I am a sole proprietor from the U.S. and I plan to use an affiliate marketer from Latin America to sell my product to this market. I will be paying him 20% commission based on the sales price for every customer he refers that buys my product.

[Anonymous]

Reporting Requirements: FAQs

One common question received is how a domestic U.S. business should treat payments made to a foreign service provider for services performed entirely outside of the U.S.  

- Are there any reporting requirements? 

- What forms are required to be filed? 

- Is the U.S. entity required to withhold tax on the payments?

Simple answer: as long as the foreign service provider is performing all of the services outside of the U.S., there is no 1099 or withholding requirement for the domestic U.S. payor. In the case where all of the services are provided outside of the US by the foreign individual then the U.S. payor does not have any obligation to withhold.

 keep copies of checks or other forms of payment and any computations and documents that back up the payments  

they are deducted on schedule c as payments to independent contractors.

i would also suggest getting a signed copy of the commission agreement which would include his address, city, state country, phone number  

[joe-87]

Thank you for answering my question timely. So just to clarify, I don't need to have my affiliate fill out form W-8BEN?

[TaxGuyBill]

You need to verify that the person is not subject to US taxes, and is not subject to withholding.  I think form W-8BEN is the proper form for that.

[joe-87]

Thank you. I read that  W-8BEN form is only required to be filled out for U.S. sourced income. U.S. Sourced doesn't mean where the person writing the check is, it means where the work was done by the payee (or an affiliate). So if the affiliate lives in South America with no employees or owned equipment in the U.S. his affiliate income is foreign sourced income. If that's the case, the foreign sourced income is not subject to tax withholding in the U.S. if I am not mistaken. No tax forms are required in this instance, e.g. the W-8BEN form.

Is this correct?

[TaxGuyBill]

No, you need to certify the person is not subject to the US tax reporting rules.  I think W-8BEN is the proper form; however, I'll flag an expert in this subject.  @pk

[pk]

Having read through the above discussion and the original post / responses thereto,  we need to consider  two items in this scenario  (a) the relationship between the US entity/person and the the foreign entity/person  --i.e. is this a  buyer service provider relationship or employer/employee relationship or a investor relationship?  Taking the simplest relationship i.e. a US entity buys a service in a foreign land and pays for it on an agreed basis. Does this expose the  foreign service provider to US taxation  i.e. does this  then make the foreign entity an earner of US sourced income.  As an example  would be an US business sells its product through on-line sales and ships products directly to the buyer in a foreign country. To improve the  market exposure, the entity advertises in local news paper and agrees to pay a flat usual fee for advertising.  Surely that  local newspaper is not subject to US taxation.  What if the newspaper was actually owned by another US entity ?  Still NO. What if  instead of a New Paper  the US business  does the advertising through a local "agent" -- assuming the agent is a local person.  The answer  would still be No.
(b) the other item to consider  is whether a  business constituted under US laws and subject to such, has a legal obligation  to know or should know whether a service provider is subject to US tax laws.  This is generally a requirement for all businesses when dealing with US persons, US entities, Non-resident aliens, Foreign entities -- by the mere fact that IRS expects the business to  provide information  returns  for ALL payments as part of  withholding requirements -- vide series 1099, W-8 forms..  Thus merely saying the service provider  is in a foreign country  does not exclude  this requirement.  At the same time the W-8 series of forms does not cover all situations --- W-8BEN specifically covers only Non Resident Aliens  present in the USA and others in the series cover entities with a financial interest in the USA..
Therefore  my suggestion would be to (a) ascertain that  the service provider is not a US citizen/resident ( even though living abroad ) i.e. absence of a Tax ID ( SSN /EIN) and (b) document  this finding and  keep records on file  that the  business  has indeed  done due diligence on  withholding requirement.

That is my opinion. @TaxGuyBill , @TaxPro+40

[TaxGuyBill]

Thanks @pk

I had THOUGHT there was an official form for that, but apparently I'm wrong.

@joseph.karout   At any rate, you DO need to document whether the person you are paying are is subject to US taxes or not.

[joe-87]

Wow. Thank you for the in-depth research and response. This is what I thought. At the end of the day, the affiliate doesn't have presence in the U.S. nor is he a U.S. citizen. As such, form W-8BEN is not required to be filled out.

I will though, make a note to document that this person is exempt from US taxes.

Thank you again pk, TaxGuBill, and TaxPro+40