When a US company pays a domestic contractor, the compliance checklist is familiar enough that most AP teams run it without thinking: collect a W-9, confirm the amount, issue a 1099 at year end if payments cross the reporting threshold. The process has rough edges but it is understood.
Paying a foreign contractor introduces a different set of requirements that AP teams often underestimate until something goes wrong. The wrong tax form, an incorrect withholding assessment, or a gap in the supplier identity verification step can each create problems that surface months after the payment has already left the account. This article covers the compliance items that most commonly get missed.
The W-8 Form Family: More Complex Than It Looks
The most common mistake is sending a foreign contractor a W-9 because that is the form the AP team knows. A W-9 is for US persons. A foreign contractor who is not a US citizen, not a US resident alien, and whose income is not effectively connected with a US trade or business should be completing a W-8 series form instead.
The specific W-8 variant depends on who the payee is. An individual foreign person generally completes a W-8BEN. A foreign entity, including a company incorporated outside the US, completes a W-8BEN-E. A foreign person claiming exemption because their income is effectively connected with a US business uses a W-8ECI. There are additional forms for intermediaries and for certain treaty-based claims.
The distinction matters because the withholding rate that applies to a payment depends in part on what the form says. A foreign individual who has not submitted any tax documentation is subject to backup withholding at a flat rate. A foreign individual who submits a properly completed W-8BEN claiming treaty benefits under an applicable tax treaty may reduce that rate substantially, potentially to zero for certain types of services income.
AP teams that issue payments to foreign contractors without collecting the right form first are not just leaving documentation gaps. They may be over-withholding (which creates a refund obligation) or under-withholding (which creates a tax liability that falls on the payer).
Withholding on Services: Not Always Required, Not Always Zero
Whether a payment to a foreign contractor is subject to US withholding depends on whether the income is considered US-source income under the relevant tax code provisions.
Services income is generally sourced to the location where the services are performed. If a foreign contractor performs all their work outside the United States, the income is typically foreign-source and not subject to US withholding. This is one reason the services field on a payment request form matters: a contractor who did research work from their home office in the Netherlands generates different withholding obligations than a contractor who traveled to a US client site to deliver the same work.
The analysis gets more complicated when the work is split between US and foreign locations, when the contractor qualifies for treaty benefits, or when the payment is for royalties or intellectual property licensing rather than services. Royalties paid to foreign persons are generally US-source income regardless of where the work was performed, and they carry their own withholding rate schedule under treaty provisions.
We are not saying these scenarios are rare. In practice, many overseas contractor engagements involve some US-facing work, some IP assignment, or some combination that puts the payment into a gray withholding zone. Teams that apply a simple "foreign contractor, no withholding needed" rule across all cases are underestimating the range of situations they will encounter.
Sanctions Screening Before Payment
Tax form collection gets most of the attention in discussions of foreign contractor compliance, but sanctions screening is equally mandatory and carries different consequences for non-compliance.
Before dispatching any payment to a foreign person or entity, US companies are required to verify that the payee is not on the Office of Foreign Assets Control (OFAC) Specially Designated Nationals list or subject to other applicable sanctions programs. Making a payment to a sanctioned party, even an accidental one, exposes the paying company to civil and criminal penalties under OFAC regulations.
The practical challenge is that most AP systems do not run real-time OFAC screening as part of the payment workflow. Screening is often done at vendor onboarding for repeat suppliers, but for one-time contractors, it can fall through the cracks entirely. A contractor who was not sanctioned at the time of vendor onboarding may be added to a sanctions list months later. A new contractor who was never onboarded may never be screened at all.
The process control here is to screen every foreign payment against current sanctions lists at the time of payment dispatch, not at the time of record creation. The list is dynamic. An onboarding-time screen is a stale check for anything other than very recent onboarding.
Entity Verification: Know Who You Are Paying
For domestic contractors, the W-9 serves a dual purpose: it collects the taxpayer identification number and it represents a certification from the payee that the information they are providing is accurate. For foreign contractors, the identity verification step needs to be handled separately.
Know-Your-Business (KYB) verification for foreign entities typically involves confirming the entity's registration in its home jurisdiction, verifying the legal name matches the name on the invoice, and checking ownership structure in cases where the payment amount or relationship warrants it. For individuals, identity verification involves confirming that the name, country, and other identifying information on the tax form match what the paying company has on file.
These checks exist to prevent two distinct problems: accidental payments to impersonators (where a fraudulent party intercepts an invoice or submits one under a legitimate supplier's name), and deliberate payments to entities that would not pass a compliance review if properly identified. Neither problem is hypothetical. Wire fraud targeting AP teams via supplier impersonation is a well-documented attack pattern in enterprise payment operations.
What Documentation You Need to Keep
The compliance work on a foreign contractor payment does not end when the funds leave the account. The documentation trail needs to survive an audit.
At a minimum, the record should include the completed and signed W-8 series form, the withholding calculation with the rationale for the rate applied, any treaty benefit claim documentation, the sanctions screening result at time of payment, and the entity verification outcome. This documentation should be retained for a period consistent with your organization's tax records retention policy, typically a minimum of three years from the due date of the tax return for which the records are relevant, though some organizations apply longer retention periods for international payment records.
The challenge in practice is that these items are often assembled across multiple systems and email threads rather than stored as a consolidated payment record. When an audit inquiry arrives two years after a payment, reconstructing that trail from scattered sources is time-consuming and sometimes impossible. The documentation discipline that seems like overhead at payment time is what protects the AP team from a much larger investigation overhead later.
Where This Breaks Down in Practice
Most of the compliance failures we see in foreign contractor payments are not the result of teams ignoring the rules. They are the result of teams applying a domestic contractor workflow to a foreign contractor situation without recognizing how much the requirements differ.
The W-9 sent to a foreign individual. The withholding calculation skipped because "services are foreign-source." The OFAC screen done at onboarding and never repeated. The audit trail stored in an email thread that no one can find 18 months later. These are process gaps, not intent gaps.
The complexity of foreign contractor compliance is not reducible to a simple checklist, but it is manageable with the right process design. The key is treating foreign contractor payments as a distinct workflow from domestic contractor payments, with the verification and documentation steps built in from the start rather than added retroactively when something goes wrong.