Most agency owners know the 1099 as the form you send the freelance designer in January. The first time they pay an offshore subcontractor, they either file one out of habit or file nothing and hope. Both are guesses. The IRS decides the paperwork by asking two things before it asks anything about a 1099: who is the payee, and where was the work done?
This post lays out how the IRS's own instructions split those cases, so you can collect the right form on day one instead of reconstructing it in a January panic. It is general information, not tax advice. Your CPA makes the final call on any specific payment.
What changed for 1099-NEC in 2026?
The reporting floor went up. The IRS's Instructions for Forms 1099-MISC and 1099-NEC, the version labelled 12/2026 and fetched from IRS.gov on 2 October 2026, say that for tax years beginning after 2025 the minimum threshold for reporting certain payments increased to $2,000 and may be adjusted for inflation beginning in calendar year 2027. For Form 1099-NEC, that means nonemployee compensation of $2,000 or more in a calendar year.
If you had a rule of thumb that said "$600 and I file," retire it for payments made from 2026. If you have small, one-off US freelancers, many of them now fall under the line. That matters less for an offshore bench than for the next point.
Who gets a 1099-NEC at all?
Not everyone you pay. The same IRS instructions say that payments to a corporation, including an LLC treated as a C or S corporation, generally do not require a 1099-NEC. The exceptions the instructions name are attorneys' fees and certain payments by federal executive agencies, neither of which is a software subcontract.
Picture a 14-person agency with three kinds of overflow help in a year: a US freelance developer who invoices as a sole proprietor, a two-person US studio set up as an S corporation, and an engineer in another country who invoices through a local company. The freelancer is the clear 1099 case. The studio generally is not, because it is a corporation. The offshore engineer is the one where the 1099 instructions stop being the useful document.
Where was the work performed?
IRS Publication 515 (2026), Withholding of Tax on Nonresident Aliens and Foreign Entities, fetched on 2 October 2026, says that for personal service income, "the place where the services are performed determines the source of the income, regardless of where the contract was made, the place of payment, or the residence of the payer." Its source table says the same thing in short form: pay for personal services is sourced where the services are performed.
That matters because withholding follows source. Publication 515 states that a withholding agent must withhold on a payment of U.S. source fixed or determinable annual or periodical (FDAP) income. Your US address, your US bank account and your US contract do not make an engineer's pay U.S. source. Where their hands were on the keyboard does.
Two things follow, and one does not. If an engineer abroad writes your code from abroad, the pay is generally foreign source for this purpose. If that same engineer flies to your client's office in Chicago for three weeks, the pay for those days is U.S. source, and Publication 515 says to allocate on the facts, in most cases on a time basis: total pay multiplied by days worked in the United States over total days paid. What does not follow is that you can ignore the question. You still need to show on paper why you did not withhold.
Which form proves it: W-8BEN or W-8BEN-E?
The IRS built a certificate for exactly this. The Instructions for Form W-8BEN (revised 10/2021, fetched 2 October 2026) say a nonresident alien who is the beneficial owner of an amount subject to withholding gives the form to the withholding agent or payer. Form W-8BEN is for individuals. The IRS publishes a separate Form W-8BEN-E for entities, so an engineer who invoices through their own company completes that one instead.
The same W-8BEN instructions list when not to use it, and one entry is worth knowing: a nonresident alien individual claiming exemption from withholding on compensation for personal services performed in the United States provides Form 8233 or Form W-4, not a W-8BEN. So the form depends on the payee and on where they are working, which is the whole point.
My opinion, and I will defend it on a call: collect the form before the first invoice is paid, from every non-US payee, even when you are almost sure no withholding applies. A certificate in the file on day one is the cheap version of an answer to a question your CPA or an IRS notice may ask two years later. Asking in month fourteen, after a falling-out, is the expensive version.
What does the engagement paperwork look like in practice?
Build it as a short intake, one page, sent with the subcontract:
- 1.Name and country of the entity or individual who will invoice you.
- 2.A signed W-9 if they are a US person, or the right W-8 form if they are not.
- 3.A written statement of where the work will be performed, and a clause requiring notice before any days of work are done on US soil.
- 4.The invoicing entity matches the entity on the form and on the subcontract. A bench that sends invoices from a different company than the one that signed is a mismatch to fix before payment, not after.
- 5.The signed IP assignment chain from our post on who owns code written by a subcontractor, kept in the same folder.
None of this slows a start. It is an afternoon of email, once, per payee.
When is offshore the wrong answer?
If your client's master agreement bars non-US personnel, or the work needs US-persons-only handling, none of the tax question matters because the subcontract should not exist. If you would rather not run any cross-border payee paperwork at all, that is a legitimate preference, and the honest answer is to hire US-based help or use a partner that contracts with you as one US vendor, and to ask them in writing which entity signs and invoices. The margin and disclosure side of that choice is in the economics of white-label development, and the vetting questions are in how to vet a global development partner.
Before your next payment run, list every subcontractor you have paid this year with three columns: legal entity, country, and the form on file. Any blank in the third column is your January problem arriving early. If you are an agency weighing overflow capacity and want the paperwork and a paid pilot settled before anything client-facing depends on it, see how our partner arrangement works, look at a dedicated team built for you if a subcontract is not the right shape, or tell us the scope. The day-to-day side of running a bench is in our write-up on managing an offshore bench.