Do I Send a 1099 to a Canadian Contractor?

If you hire a Canadian contractor who works from Canada and that contractor gives you a properly completed W-8BEN, you do not send a 1099. The 1099-NEC reporting requirement under IRC 6041 applies to payments made to US persons. A Canadian contractor who provides a W-8BEN is certifying that they are a non-US person, which takes them out of the 1099 reporting system entirely. You keep the W-8BEN on file as your documentation, and that is the end of your reporting obligation on payments for services performed outside the United States.

Do I send a 1099 to a Canadian contractor?

Not if they gave you a W-8BEN. The 1099-NEC (Nonemployee Compensation) is filed with the IRS and sent to the payee when you pay $600 or more during the year to a US person for services. The key phrase is “US person.” A Canadian individual who provides a W-8BEN is certifying foreign status, which removes them from the 1099 reporting population. The IRS instructions for Form 1099-NEC confirm that payments to foreign persons that are not subject to US withholding and are not effectively connected with a US trade or business are generally not reportable on Form 1099.

Instead of a 1099, your documentation is the W-8BEN itself. You are required to collect it before the first payment (or, at latest, at the time of payment), verify that it is properly completed, and retain it for as long as the IRS could examine the return plus three years. If the Canadian contractor does not provide a W-8BEN, you are required to withhold 30% of each payment under the backup withholding rules for foreign persons (IRC 1441) and report the payments on Form 1042-S, not a 1099.

The practical rule: ask every foreign contractor for a W-8BEN before the first payment. If they provide one, no 1099, no withholding. If they do not, withhold 30% and report on Form 1042-S.

What form does the Canadian contractor give me instead of a W-9?

The W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting). This is the non-US equivalent of the W-9 for individuals. For a Canadian corporation or other entity, the form is the W-8BEN-E. The critical difference is that a W-9 certifies US person status and puts the payee into the 1099 system, while the W-8BEN certifies foreign status and takes them out of it.

A properly completed W-8BEN from a Canadian contractor includes their name, Canadian address, Canadian tax identification number (Social Insurance Number for individuals), a claim under the Canada-US tax treaty, and the specific treaty article that exempts the income from US tax. For services (business profits), the relevant article is Article VII of the Canada-US tax treaty, which provides that business profits of a Canadian resident are taxable only in Canada unless the Canadian has a permanent establishment in the US through which the profits are earned.

The W-8BEN is valid for three calendar years from the date of signing (through December 31 of the third year). After that, you need a new one. If the contractor’s circumstances change (they move to the US, they incorporate, they start working from a US office), the existing W-8BEN becomes invalid and you need a new form or a different form.

Do not accept a W-9 from a Canadian contractor who is not a US person. A W-9 would put them into the 1099 system and create a reporting mismatch with the IRS. If a Canadian contractor hands you a W-9, ask for the W-8BEN instead.

Do I withhold taxes on payments to a Canadian contractor?

Not if the W-8BEN is valid and claims the treaty exemption. Under Article VII of the Canada-US tax treaty, business profits earned by a Canadian resident are taxable only in Canada when the Canadian does not have a permanent establishment in the US. “Permanent establishment” means a fixed place of business: an office, a branch, a factory, or a construction site that lasts more than 12 months. A Canadian working from their home office in Toronto for your US company does not have a US permanent establishment, so the treaty rate on their business profits is zero.

Without a W-8BEN, the default withholding rate under IRC 1441 is 30% of each payment. This is not a penalty; it is the statutory withholding rate on US-source income paid to foreign persons who have not established treaty benefits. The 30% withholding is reported on Form 1042-S (Foreign Person’s US Source Income Subject to Withholding), filed annually with the IRS by March 15.

If the Canadian contractor provides a W-8BEN claiming the treaty exemption and the claim is valid (they are a Canadian resident, they have no US permanent establishment, and the income is business profits rather than, say, royalties), you withhold nothing. You pay the contractor the full amount and keep the W-8BEN on file.

One exception: if the payments are royalties rather than business profits (for example, licensing fees for intellectual property), the treaty rate is 0% on copyright royalties and 10% on other royalties under Article XII. The W-8BEN should specify the income type and the applicable treaty article. If you are unsure whether a payment is business profits or royalties, the distinction is whether you are paying for a service (business profits) or for the use of an asset (royalties).

What if the Canadian contractor performs work inside the US?

If the Canadian contractor physically travels to the US and performs services here, the analysis changes. Income earned for services performed inside the US is US-source income under IRC 861(a)(3), and the treaty exemption under Article VII only applies if the Canadian does not have a US permanent establishment and their total US presence in the tax year is relatively limited.

For independent personal services (which is how most contractor relationships are classified), Article XIV of the treaty provides that a Canadian resident’s income from services performed in the US is taxable only in Canada unless the Canadian has a “fixed base regularly available” in the US. If they do have a fixed base (an office, a co-working space they use regularly), the income attributable to that base is taxable in the US.

For dependent personal services (employment), Article XV exempts the income from US tax if the Canadian is present in the US for fewer than 183 days in the calendar year, is paid by a non-US employer, and the remuneration is not borne by a US permanent establishment.

The practical question for a US business is: did the Canadian contractor do the work from Canada, or did they come to the US to do it? If the work was performed from Canada, the treaty exemption applies and you withhold nothing. If the contractor came to the US for a project and spent significant time here, you may need to withhold and the contractor may need to file a US return. The split-time residency guide covers the day-counting mechanics.

What about paying a Canadian corporation instead of an individual?

If the contractor operates through a Canadian corporation, the form is the W-8BEN-E (the entity version) rather than the W-8BEN (the individual version). The treaty analysis is similar: Article VII exempts business profits of a Canadian corporation from US tax when the corporation does not have a US permanent establishment. The W-8BEN-E includes a section for the entity’s Canadian tax identification number (the Business Number) and the treaty claim.

From your reporting perspective as the US payer, the mechanics are the same: collect the W-8BEN-E, verify it is complete, withhold nothing if the treaty exemption applies, and keep the form on file. No 1099 is issued. If the Canadian corporation does not provide a W-8BEN-E, you withhold 30% and report on Form 1042-S.

One additional consideration when paying a Canadian corporation: if the Canadian corporation is owned by a US citizen or US resident, the US shareholder may have separate reporting obligations (Form 5471 if they own 10% or more, or Form 8865 for certain partnership interests). These are the shareholder’s obligations, not yours as the payer, but they sometimes surface during the engagement. The Form 5471 guide covers the filing requirements.

What are the penalties for getting this wrong?

Two types of penalties apply: withholding penalties and information-return penalties. If you were required to withhold (because the contractor did not provide a W-8BEN and you paid the full amount anyway), you are liable for the tax that should have been withheld, plus interest and a potential penalty under IRC 6656 for failure to deposit. The penalty ranges from 2% to 15% of the underwithholding depending on how late the correction is.

If you should have filed a Form 1042-S and did not, the penalty under IRC 6721 is $310 per form (2025), up to a maximum of roughly $3.78 million per year for large businesses. For small businesses (gross receipts of $5 million or less), the cap is lower.

If you issued a 1099-NEC to a Canadian contractor when you should not have (because they provided a W-8BEN), the error is less consequential but creates a mismatch: the IRS expects a 1099 payee to file a US return, and the Canadian contractor will receive CP2000 notices for unreported income. Correcting this requires filing a corrected 1099 (zeroing out the amount) and potentially helping the contractor respond to the IRS notice.

The cheapest path is to collect the W-8BEN before the first payment. The form costs nothing, takes five minutes to complete, and resolves every downstream reporting and withholding question in one step.

What should I do next?

If you are a US business hiring Canadian contractors (or a Canadian contractor working for US clients), the W-8BEN is the single document that governs the reporting, withholding, and treaty analysis. If you are unsure whether a specific payment qualifies as business profits or royalties, whether a contractor’s US presence creates a permanent establishment, or how to handle a mixed scenario (some work in Canada, some in the US), a cross-border tax assessment sorts out the classification and sets up the correct withholding and reporting structure.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.