Paying contractors the right way protects your LLC from IRS penalties and keeps your books clean at tax time. This guide covers the difference between US and foreign contractors, the forms you need to collect, and how PowerLaunch's MyCG.AI platform helps you track it all.
Why contractor paperwork matters
When your LLC pays someone for services, the IRS wants to know who got paid and how much. You collect a form from the contractor before you pay them, not after. That form tells you whether the payment needs to be reported on a 1099-NEC and whether you need to withhold any tax. Skipping this step is one of the most common mistakes new founders make, and it can lead to penalties or backup withholding problems later.
US contractors: collect a W-9
If you pay someone who is a US person, meaning a US citizen, a US tax resident, or a US-based business, you ask them to fill out Form W-9 before you send the first payment. The W-9 gives you their legal name, business type, and taxpayer identification number. You do not send the W-9 to the IRS. You keep it on file. If the contractor refuses to provide one, US tax rules generally require you to withhold a percentage of the payment as backup withholding, so it is worth getting this sorted before money moves.
Foreign contractors: collect a W-8BEN
If the contractor is not a US person, meaning they live and work outside the United States and are not a US citizen, you ask for a Form W-8BEN instead, or a W-8BEN-E if they operate through a foreign business entity. This form certifies that the contractor is a foreign person and states whether a tax treaty between their country and the United States reduces or eliminates withholding on the payment. Like the W-9, you keep the W-8BEN on file and do not send it to the IRS unless asked.
A common mix-up is treating every non-US contractor the same way tax-wise. Withholding obligations depend on the type of service, where the work is performed, and any treaty in place, so if you are unsure, check the IRS instructions for the W-8BEN or ask a tax professional during your review.
W-9 versus W-8BEN at a glance
| W-9 | W-8BEN | |
|---|---|---|
| Who fills it out | US person or US business | Foreign individual |
| Who fills out W-8BEN-E instead | Not applicable | Foreign business entity |
| Sent to the IRS | No, kept on file | No, kept on file |
| Main purpose | Confirms US tax status and TIN | Confirms foreign status, checks treaty benefits |
| Reporting form triggered | 1099-NEC, if payments meet the threshold | Form 1042-S in some cases, not 1099-NEC |
| Backup withholding risk if refused | Yes | Different withholding rules apply |
Rules on thresholds and withholding percentages change from time to time, so always check the current IRS instructions for the form you are using before you rely on a specific number.
1099-NEC basics
Form 1099-NEC reports nonemployee compensation, meaning payments to US contractors for services. If you paid a US contractor above the reporting threshold for the year, you generally need to file a 1099-NEC with the IRS and send a copy to the contractor. The form is due early in the following year, well before your main business tax filing deadline, so it is worth diarizing it separately.
Payments to foreign contractors for services performed outside the United States usually do not go on a 1099-NEC. Depending on the situation, they may instead be reported on a different form, such as a 1042-S, particularly when tax was withheld under a treaty. This is an area where the correct treatment depends on facts specific to your business, so a licensed tax professional should review your contractor list at least once a year.
What if you forget to collect the form
If you already paid a contractor without a W-9 or W-8BEN on file, do not panic, but do not ignore it either. Ask for the form now and keep a note of the date you requested it. If the contractor never provides one, talk to a tax professional about whether backup withholding applies retroactively and how to handle the reporting for that payment. This is exactly the kind of question a Run or Scale plan consultation is built for.
How this connects to your LLC's own tax filings
Paying contractors is separate from your LLC's own federal filings, but the two are related. If your LLC is foreign-owned and treated as a single-member disregarded entity, you still have your own annual obligation to file Form 5472 along with a pro forma 1120 by April 15, regardless of how many contractors you paid during the year. Keeping contractor records tidy makes that filing faster, because your tax preparer is not chasing down invoices at the last minute.
Record keeping in MyCG.AI
The Run and Scale plans include transaction tracking with AI categorization inside MyCG.AI, so every payment to a contractor gets tagged and stored alongside the invoice or W-9 or W-8BEN you collected. This matters at year end because you need a clean list of who you paid, how much, and what form is on file for each person. Instead of digging through email threads in January, you pull a report. Scale plan customers also get a dedicated bookkeeper who can flag missing forms before they become a filing problem.
If you are only on the Launch plan and manage contractor payments yourself, you can still store W-9s and W-8BENs securely and refer to them when 1099 season arrives, but you will not have the automated categorization or the tax professional consultation that Run and Scale include.
What to do next
Collect a W-9 or W-8BEN from every contractor before the first payment goes out, and keep those forms somewhere organized. If you want a licensed tax professional to review your contractor setup and make sure your 1099 filings are on track, the Run and Scale plans include that consultation as part of the annual price. You can compare plans and start at powerlaunch.solutions/signup, or book a free 20-minute consultation at powerlaunch.solutions/book if you want to talk through your specific contractor situation first.
