By Steven D. Mercatante Esq. 

Two questions above all others demand an answer any time a Form 1099 filer sets up a new vendor account:
1.) Who is my payee?
2.) What is the payment for?
 
This article focuses on question number one: Who is my payee? Incidentally, you have to be able to answer both questions to determine if you have a reportable payment and payee. Moreover, if you determine you are dealing with a Non U.S. Person you also have to answer the critical question of where; meaning where was the service performed. So that is it; know your who, what and where and you will be all set in terms of becoming compliant with IRS mandates and rules. Unfortunately, the devil is in the details and those details trip up far too many filers.
 
To answer the question who, including whether and how to report a payment to a particular payee, you must know that payee’s status. Are they a U.S. person or a Nonresident Alien? The answer to this question is critical as the reporting and withholding requirements are different for each type of payee. First, let us start with the U.S. Person.
 
U.S. Persons: Who are they?
The definition of a U.S. person is simple. U.S. persons include U.S. citizens, entities incorporated or registered within the United States, and resident aliens. If we are discussing a resident alien then we are discussing a person who has achieved their residency status in one of two ways: they obtain immigration documents, such as a green card, or they are present in the United States for a sufficient number of days that, for tax purposes, they become residents. Tax residency status is much easier to achieve than immigration residency status.
 
Unlike most countries, the United States taxes its citizens and residents on their worldwide income. Therefore, even if you were to move to Italy, spend the rest of your life working in France for an Italian company, earning your salary in Euros, you would still be subject to U.S. tax laws if you maintained your citizenship or U.S. residency status. Thus, just because you are paying a person who is located in another country does not mean that the payment is exempt from reporting. If you have any reason to know that your payee is a U.S. person living abroad, the Form 1099 rules will apply. This still begs the question: how do you know whether you are paying a U.S. person or a nonresident alien? The answer is simple.
 

Is my Payee a U.S. Person or a Nonresident Alien?

If you are paying a person (including entity) located in the United States, you may presume them to be a U.S. person, unless you have reason to know or suspect otherwise. This means gathering documentation is critical to your compliance policy.
 
Therefore, the best step you can take is to request your payee complete a Form W-9 (or appropriate substitute). Completion of a Form W-9 by a payee provides you with documentation that your payee is a U.S. person, as the form includes language indicating this status. Remember, reportable payments to U.S. persons are reported on one of the Forms 1099.
 
However, the rule for reporting payments made to nonresident aliens is different: payments of U.S. source income to a nonresident alien are reportable on the Form 1042-S and subject to 30% withholding. To get to that point however, you must be able to identify your payee as a nonresident alien and your payment as a payment of U.S. source income. The W-9 is still your best tool but you may need to bring one of the Forms W-8 into play if you think you are dealing with a non-resident alien. Bringing the Forms W-8 into play leads to that third question we mentioned at the start of this article.
 
Remember earlier in the article where we mentioned you need to know the who, what and where? What the where referred to is exactly that situation when you think you may be dealing with a non-resident alien. What the where means is in reference to the source of the income. The actual question you are asking yourself is: where is the source of the income? If the income can be sourced to the U.S. then you may have a reportable payment to your non-resident alien individual. Nevertheless, what is U.S. source income?