Also, for the other 4 I subcontracted work out to that ARE US Citizens, do I send them 1099s or how do I include that as well on my income taxes and what info will I need to report their subcontracted work I paid them for via paypal? I was told by the Canadian subcontractor her accountant told her she does not need to fill out the w-8ben and it would not work because she was performing services outside of the US and it was digital subcontracted work, and she's not actually performing services in the US.
First, if you make payments to foreign persons or corporations and don't have their tax information on a form W-8, you are required to withhold 30% for taxes. You would issue a form 1042-S to the payee, withholding 30% which you send to the IRS. The vendor gets that withholding back if they file a proper non-resident income tax return. (The mandatory withholding requirement is to "encourage" foreign persons to file US tax returns for US-sourced income.)
To avoid mandatory withholding, the payee/vendor must give you the correct form W-8BEN (there are several versions depending on if they are a sole proprietor, a corporation, or something else.). See generally here https://www.irs.gov/pub/irs-pdf/iw8.pdf
If you have the correct form W-8BEN for the payee, you don't need to withhold tax and you don't need to issue a 1099-MISC. You keep the W-8BEN in your records to show to the IRS (if audited) why you did not withhold tax on payments to this foreign person.
If you don't have form W-8BEN for your foreign payees (and don't get them soon), and didn't withhold the mandatory 30%, you may have a serious compliance problem and I would suggest meeting with a tax expert to review the rules so you can get yourself out of trouble and prevent getting into new trouble.
See also this https://www.irs.gov/publications/p515
Thanks for your clarification. I had a W-8BEN and did not withhold as is the rule. Just out of curiosity, how then does the Foreign person report their US income? Do I file anything that the IRS can reconcile with the Foreign person?
A foreign citizen reporting their US based income would report their income on a 1040 NR form to the IRS. Whether they file this or not is up to their discretion.The only reporting tool available for you is the 1099 Misc form because this would match up with the information reported in the 1040 NR form filed with the IRS, if filed.
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