[keylimes]

I have a business selling how-to guides online in a downloadable format. Some of the guides are written by foreign authors. We pay them 50% for product sales each month via PayPal.

For our US-based authors that make over $600, we provide a 1099-MISC. My question is, do I need to provide a 1042-S to our foreign authors for the payments they received? I can't tell the situation in which a 1042 applies. I'm pretty sure I don't need to give them a 1099.

Thanks!

[MukatA]

Foreign authors are not required to file U.S. return. So you must withhold tax as per tax treaty with the country.

[keylimes]

So I need to do withholding, but I do not need to provide the author with a 1042-S? I'm unfamiliar with tax-treaty related withholding, so this should be a new experience..

[AtlantaTaxExpert]

Actually, what you are paying them are royalties, which are subject to a 30% tax (unless the tax treaty says otherwise).

You WOULD use Form 1099-MISC to report the royalties, and they have to apply for ITINs for you to properly preare the Form 1099-MISC.

[Five Rings]

Well actually you must withhold 30% until they SUBMIT TO YOU a Form W8-BEN claiming a treaty benefit.
To claim a treaty benefit the authors must obtain an ITIN by submitting a Form W-7.
Many times the treaty rate is just 10% which you are obliged to pay over to the Treasury. To determine the correct amount of withholding see Publication 515 (2009), Withholding of Tax on Nonresident Aliens and Foreign Entities See the part about "income not effectively connected", and check table 1.
Nonresident aliens should get a 1042S, citizens and green card holders abroad get a 1099-MISC after submitting to you a Form W-9.

[AtlantaTaxExpert]

I yield to Five Rings' greater knowledge regarding the use of Form 1042-S.

[IntlTax]

And you are a "withholding agent." This means that you are liable for the 30% tax if you don't withhold.