Foreign contractors pay US taxes only on income for work they physically perform inside the United States. Work done entirely abroad for a US client is foreign-source income and falls outside the US tax system, even when the payer, the contract, and the bank transfer are all American. Once any part of the work happens on US soil, that portion becomes US-source income, and the default rule is that the US payer must withhold 30% of the gross payment and send it to the IRS. Treaties, specific forms, and a narrow statutory exception can lower or eliminate that 30%, but only when the paperwork is in place before payment.
Where the Work Is Performed Controls Everything
For a nonresident alien, the US taxes only US-source income, and service income is sourced to the place where the work is physically done. The location of the client, the currency, the contract, and the bank account are all irrelevant.1Internal Revenue Service. About Source of Income – Personal Service Income A developer in Berlin who never sets foot in the United States and bills a Chicago company owes no US tax on that project.
When a project is split between countries, the compensation is allocated on a time basis. Divide US working days by total working days, and apply that fraction to the total fee. A $10,000 project with 30 US working days out of 100 produces $3,000 of US-source income. Only that $3,000 is potentially taxable in the United States.1Internal Revenue Service. About Source of Income – Personal Service Income
The Narrow 90-Day Exception
A statutory exception can wipe out the tax on US-performed services, but all three of its conditions have to be met at once: the contractor is in the US for no more than 90 days in the tax year, total pay for the US-performed work does not exceed $3,000, and the payer is a foreign person or foreign entity not engaged in a US trade or business.2Office of the Law Revision Counsel. 26 US Code 861 – Income From Sources Within the United States The third condition is what rules this out for most readers. If a US business is directly hiring and paying the contractor, the exception almost never applies, and the full US-source amount is taxable under the default rules.3Internal Revenue Service. Federal Income Tax Withholding and Reporting on Other Kinds of US Source Income Paid to Nonresident Aliens
30% Withholding Is the Default
When a US payer sends US-source compensation to a foreign contractor, the starting rate is a flat 30% of the gross amount, with no deductions allowed. The US payer is the withholding agent and is personally liable for the tax.4Internal Revenue Service. Publication 515 (2026), Withholding of Tax on Nonresident Aliens and Foreign Entities If the payer fails to withhold and the contractor never pays, both are on the hook for the tax plus interest and penalties.5Office of the Law Revision Counsel. 26 US Code 1461 – Liability for Withheld Tax
Without documentation from the contractor, the payer must withhold the full 30%. There is no informal workaround. Collecting the right paperwork before the first payment is the whole game.
Bringing the Rate Down With a Treaty
The US has income tax treaties with dozens of countries. Many of them include “Independent Personal Services” or “Business Profits” articles that reduce the withholding rate, often to zero, when the contractor meets specific conditions such as the absence of a fixed base in the US or a limit on days present.
An individual contractor claims a treaty exemption on service compensation by giving the US payer a completed Form 8233. It identifies the country of residence, the specific treaty article being claimed, and the contractor’s foreign tax identification number.6Internal Revenue Service. About Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual Once the payer accepts the form, the reduced treaty rate replaces the 30%.
Form W-8BEN is the general certificate of foreign status for individuals and is used to claim treaty benefits on other income types like royalties and dividends.7Internal Revenue Service. About Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) For personal service compensation specifically, Form 8233 is the right tool. Foreign corporations and other entities use Form W-8BEN-E to certify foreign status and claim treaty benefits.8Internal Revenue Service. About Form W-8 BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)
Watch the expiration date. A W-8BEN generally expires on the last day of the third calendar year after it was signed. A form dated any time in 2026 is good through December 31, 2029, unless circumstances change sooner.9Internal Revenue Service. Instructions for Form W-8BEN (10/2021) Once it lapses, the payer must collect a new one or go back to 30% withholding. This is one of the easiest compliance items to lose track of with long-running contractors.
The Graduated-Rate Alternative
There is a second path that some contractors prefer. The IRS generally treats a foreign person performing personal services in the US as engaged in a US trade or business, which makes the service income “effectively connected” to that business.10Internal Revenue Service. Effectively Connected Income (ECI) Effectively connected income is taxed at the same graduated rates that apply to US citizens and residents rather than the flat 30%.11GovInfo. 26 US Code 871 – Tax on Nonresident Alien Individuals
To use this route, the contractor gives the payer Form W-8ECI. With a valid W-8ECI on file, the payer does not withhold the 30%. The contractor instead files a US tax return and pays tax at graduated rates after deducting allowable business expenses.4Internal Revenue Service. Publication 515 (2026), Withholding of Tax on Nonresident Aliens and Foreign Entities For contractors with real expenses to deduct, that can produce a lower effective rate than 30% of gross.
No US Self-Employment Tax
Nonresident aliens are not subject to US self-employment tax.12Internal Revenue Service. Self-Employment Tax for Businesses Abroad A foreign contractor who remains a nonresident alien owes no Social Security or Medicare tax on US-source earnings, even when income tax is due. This is a meaningful difference from how domestic contractors are treated on the same work.
If a contractor’s US presence eventually makes them a US resident for tax purposes, totalization agreements between the US and various countries prevent paying into two social security systems at once. The worker claims the exemption with a Certificate of Coverage from their home country’s agency.13Internal Revenue Service. Totalization Agreements
Does the Contractor Still Have to File a Return?
Usually, yes. A nonresident alien engaged in a US trade or business during the year must file Form 1040-NR, even when a treaty makes all the income exempt and even when no tax is owed. Because performing personal services in the US generally counts as a US trade or business, most foreign contractors who set foot on US soil for work will need to file.14Internal Revenue Service. Instructions for Form 1040-NR (2025)
Independent contractors who did not receive wages subject to regular payroll withholding have until June 15 of the following year to file Form 1040-NR.14Internal Revenue Service. Instructions for Form 1040-NR (2025) Filing is also the way to recover an overpayment. If 30% was withheld but a treaty should have reduced the rate, the return is how the contractor gets that money back.
Getting a US Tax ID
Treaty claims and proper withholding both depend on the contractor having a US taxpayer identification number.
An individual who is not eligible for a Social Security number can apply for an Individual Taxpayer Identification Number with Form W-7. A nonresident alien applying specifically to claim treaty benefits uses a designated exception on the form and has to identify the treaty country and article.15Internal Revenue Service. Instructions for Form W-7 (12/2024) Anyone receiving compensation for personal services performed in the US should first apply for an SSN through the Social Security Administration. Only if that application is denied can they apply for an ITIN.
A foreign entity that needs an Employer Identification Number cannot use the IRS online application if it has no US legal residence or place of business. It applies by phone at 267-941-1099, Monday through Friday, 6 a.m. to 11 p.m. Eastern, or by fax to 304-707-9471, which is typically processed within four business days.16Internal Revenue Service. Instructions for Form SS-4
What the US Payer Files Each Year
Withholding the right amount is only part of the payer’s job. Two annual filings and a running deposit schedule complete it.
Form 1042-S for Each Contractor
Every foreign contractor who receives US-source income gets a Form 1042-S, even if a treaty reduced the withholding to zero.17Internal Revenue Service. Who Must File Form 1042-S, Foreign Persons US Source Income Subject to Withholding It reports gross income paid and tax withheld, and it must reach both the contractor and the IRS by March 15 of the following year. When March 15 falls on a weekend or holiday, the deadline moves to the next business day.18Internal Revenue Service. Instructions for Form 1042-S (2026)
Form 1042 as the Annual Summary
Form 1042 aggregates all the year’s 1042-S filings and reconciles total withholding against total deposits. It is also due by March 15.19Internal Revenue Service. Instructions for Form 1042 (2025)
Deposits Through EFTPS
Withheld tax is deposited through the Electronic Federal Tax Payment System. The schedule turns on cumulative undeposited amounts rather than annual liability, and quarter-monthly periods end on the 7th, 15th, 22nd, and last day of each month:20Internal Revenue Service. 2025 Instructions for Form 1042
- If $2,000 or more is undeposited at the end of a quarter-monthly period, deposit within three business days.
- If $200 to $1,999 is undeposited at month-end, deposit within 15 days after the month closes.
- If less than $200 is undeposited at year-end, pay with the Form 1042 filing or deposit by March 15 of the following year.
Penalties apply for late or short deposits, so tracking the running balance through each quarter-monthly period matters more here than with standard payroll deposits.
State Tax Is a Separate Question
Federal rules are only half of it. Many states impose their own withholding on payments to nonresident service providers, with rates and thresholds that vary widely and some triggering on any in-state work. A US business making payments for services performed on-site in a given state should check that state’s requirements directly, since state obligations run independently of the federal rules and carry their own penalties.