Most cross-border articles about 1099 reporting answer the wrong question. They explain what happens when a US company hires a foreign contractor. The reverse case, a Canadian-owned LLC paying a US contractor, gets almost no coverage even though it is the more common situation for Canadian founders. This post is the decision tree for that case: who must issue 1099-NEC, when W-9 is mandatory, what 24% backup withholding is, and how to handle a foreign contractor your LLC pays from outside the US.
30-second answer
If your Canadian-owned single-member or multi-member LLC pays $600 or more during a calendar year to a US contractor for services, the LLC must issue Form 1099-NEC to that contractor by January 31 of the following year and file Form 1096 with the IRS. The LLC is the withholding agent regardless of whether you, the owner, are a Canadian non-resident. To avoid 24% backup withholding, collect a signed Form W-9 from the contractor before the first payment. For foreign contractors paid for services performed outside the US, you generally do not issue 1099-NEC or 1042-S and instead collect Form W-8BEN or W-8BEN-E for your records.
Why your foreign-owned LLC is a US withholding agent
The most common misconception among Canadian-resident LLC owners is that "my LLC is foreign-owned, so US reporting rules do not apply to me." That is wrong. The IRS treats the LLC as a US person for information-reporting purposes regardless of where the owner lives.
| Owner residency | LLC reporting status | 1099-NEC duty |
|---|---|---|
| Canadian resident, owns Wyoming LLC | LLC is a US person for §6041 reporting | Yes, on US contractor payments $600+ |
| Canadian resident, owns Delaware LLC | Same | Yes |
| Canadian resident, owns disregarded SMLLC | LLC still files 1099 under its own EIN | Yes |
| Canadian resident, MMLLC partnership | Partnership files 1099 under its EIN | Yes |
The trigger is the LLC, not the owner. Section 6041 of the Internal Revenue Code requires "every person engaged in a trade or business" who pays $600 or more for services to file an information return. Your Canadian-owned Wyoming LLC, by paying a US contractor, is engaged in a trade or business under that section.
You also need an EIN to issue 1099-NEC. The EIN is what the contractor enters on their W-9 as the payer's TIN, and it is what you enter on Form 1096. If you formed your LLC without an EIN, you cannot legally issue 1099-NEC. Get the EIN through Form SS-4 by fax (covered in our EIN by fax guide) before your first contractor payment.
The W-9 to 1099-NEC to 1096 timeline
The reporting cycle has three documents and three deadlines. Miss the W-9 collection step and you trigger 24% backup withholding immediately.
Step 1: Collect W-9 before the first payment
Form W-9 is the contractor's certification of their TIN, name, and tax classification. The form is signed under penalty of perjury. Without it, you must withhold 24% of the gross payment and remit it to the IRS as backup withholding.
Required fields on W-9:
- Contractor's legal name (matching IRS records)
- Business name if different
- Federal tax classification (individual, sole proprietor, LLC, S corp, etc.)
- TIN (SSN, EIN, or ITIN)
- Signature and date
Best practice: collect W-9 as part of the contractor onboarding, before any work starts. Store it securely with your other tax records. You do not file W-9 with the IRS, but you must produce it on audit.
Step 2: Track payments throughout the year
Track every payment to the contractor across the calendar year. The $600 threshold is cumulative across all payments, not per invoice. A contractor you paid $300 in March, $200 in July, and $150 in November totals $650 and crosses the threshold.
Categories that count toward the $600 trigger:
- Cash compensation for services
- Commissions and fees
- Awards and prizes for services
- Reimbursements that exceed actual documented expenses
Categories that do not count:
- Payments to another corporation (with a few exceptions for legal and medical services)
- Payments for goods (only services)
- Rent paid to a real estate agent
Step 3: Issue 1099-NEC by January 31
Form 1099-NEC reports nonemployee compensation paid to the contractor. The deadline is January 31 of the year after the payment year. There are two copies:
- Copy A: filed with the IRS (electronically or on paper)
- Copy B: provided to the contractor
If you are filing 10 or more 1099 returns of any type for the year, the IRS requires electronic filing through the IRIS portal or an authorized provider. The 10-return e-file threshold became effective for tax year 2023.
Step 4: Transmit Form 1096 (paper filers only)
Form 1096 is the cover sheet that summarizes paper 1099 filings. If you e-file, you do not need Form 1096. Paper filers send Form 1096 with all paper 1099 Copies A by February 28 of the year after the payment year.
The 24% backup withholding trap
If you pay a contractor without a valid W-9, or the IRS notifies you that the TIN on a W-9 does not match its records, you must withhold 24% of every payment and remit it monthly or quarterly via Form 945. The 24% comes out of the LLC's cash, not the contractor's invoice. You cannot pass it on retroactively.
Common backup withholding triggers:
- W-9 not collected before payment
- W-9 missing TIN
- W-9 missing signature
- IRS B-notice (CP2100/CP2100A) saying TIN does not match
- Notified payee under-reported interest or dividends in prior years
If you receive a B-notice from the IRS, you have 15 business days to send a first B-notice to the contractor and start backup withholding. A second B-notice within three years requires sending a Form W-9 and stopping payments until you receive a corrected one. Document each step in writing.
Foreign contractor decision tree
When your Canadian-owned LLC pays a contractor who is not a US person, 1099-NEC does not apply. Different forms and rules govern.
| Contractor status | Service performed in | Form to collect | LLC files |
|---|---|---|---|
| US citizen or US resident | Anywhere | W-9 | 1099-NEC if $600+ |
| Foreign individual | Outside the US | W-8BEN | None (no source rule trigger) |
| Foreign individual | In the US | W-8BEN | 1042-S, withhold 30% (or treaty rate) |
| Foreign entity | Outside the US | W-8BEN-E | None |
| Foreign entity | In the US | W-8BEN-E | 1042-S, withhold 30% (or treaty rate) |
The source rule under IRC §861 places service income at the location where the service is performed. A Brazilian developer working from Brazil for your LLC produces foreign-source income, and US withholding does not apply. The same Brazilian developer working from a Miami coworking space produces US-source income subject to 30% withholding (or a treaty-reduced rate).
Document the W-8 and the work-location representation. If the IRS audits and the contractor turns out to have worked from the US for some period, the LLC can be liable for the 30% withholding plus penalties.
For a deeper W-8BEN-E walkthrough, see our W-8BEN-E for Canadian LLC members post. The form choice and Chapter 3 status decisions there apply equally when you are the payer collecting them.
State 1099 filing and CRA documentation
Federal 1099-NEC filing does not satisfy state filing in most states. The Combined Federal/State Filer Program forwards your federal 1099 to participating states automatically, but several states require separate state submission.
| State filing path | States included |
|---|---|
| Combined Federal/State Filer (CF/SF) automatic | AL, AZ, AR, CA, CO, CT, DE, GA, HI, ID, IN, KS, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NJ, NM, NC, ND, OH, OK, OR, SC, UT, VA, WV, WI |
| Separate state filing required | KY, MA (some types), PA |
| No 1099 income tax filing required | AK, FL, NV, NH, SD, TN, TX, WA, WY |
If your contractor lives in a state that requires separate filing, file directly with the state Department of Revenue in addition to federal IRS submission.
On the Canadian side, document each contractor payment as a deductible business expense for the LLC. Even though the LLC is a US entity, its profit and loss flows through to your Canadian tax return either as foreign business income (if you treat the LLC as a partnership for Canadian purposes) or as foreign dividend income (if you treat it as a corporation per the standard CRA position). Either way, contractor payments reduce the income that reaches your Canadian return.
Maintain a contractor payment ledger with: contractor name, dates, amounts, W-9 or W-8 on file, services description, and 1099-NEC filed status. This is the standard CRA documentation for foreign business expenses.
Worked examples
Case 1: SaaS founder hires US developer for $48K
Toronto-based founder owns a Wyoming SMLLC. Hires a US-resident developer in Austin to build features at $4,000/month for 12 months.
| Step | Action |
|---|---|
| Before first payment | Collect W-9 from developer |
| During year | Track all $48K of payments under developer's name |
| January 31 next year | Issue 1099-NEC reporting $48,000 in Box 1, send Copy B to developer, file Copy A with IRS |
| State filing | Texas, no state income tax 1099 filing required |
| Backup withholding risk | Zero (W-9 collected) |
Case 2: E-commerce LLC hires multiple contractors, missed W-9
Vancouver founder owns a Delaware MMLLC. Hires a logo designer for $1,500 (W-9 collected), a copywriter for $800 (W-9 collected), and a photographer for $700 (W-9 not collected before payment).
| Step | Action |
|---|---|
| Designer | 1099-NEC for $1,500, no withholding |
| Copywriter | 1099-NEC for $800, no withholding |
| Photographer | 24% backup withholding on each payment going forward; LLC must remit $168 via Form 945; collect W-9 immediately |
The photographer payment is the trap. Once you have paid without a W-9, you cannot retroactively avoid backup withholding. The LLC absorbs the 24% out of its cash and reports it on Form 945.
Case 3: Canadian LLC hires Brazilian designer remote
Calgary founder owns a Wyoming SMLLC. Hires a Brazilian designer (Brazilian resident, working from Sao Paulo) for $20K of design work.
| Step | Action |
|---|---|
| Before payment | Collect W-8BEN documenting Brazilian residency |
| Service location | Brazil (foreign-source income under §861) |
| 1099-NEC | Not required (contractor is foreign) |
| 1042-S | Not required (no US-source income) |
| Withholding | None |
| Documentation | Keep W-8BEN, written agreement showing service performed in Brazil |
Case 4: LLC hires foreign contractor who relocates mid-year
Halifax founder hires an Indian developer at $5K/month. Developer works from India for six months, then relocates to a US tech hub on a work visa for the next six months and continues serving the LLC.
| Period | Action |
|---|---|
| Months 1-6 (India) | W-8BEN, no withholding, no 1042-S |
| Months 7-12 (US) | Updated documentation needed: contractor may now be a US resident under SPT, in which case W-9 applies and 1099-NEC is required for the US portion |
| If still non-resident with US-source income | 1042-S for US-source portion at 30% (or treaty-reduced) withholding |
This is the most error-prone scenario in cross-border contractor work. Document every status change in writing and request updated W-8 or W-9 from the contractor.
Frequently asked questions
Does my LLC issue 1099-NEC if I pay a corporation for services?
Generally no. Payments to corporations are exempt from 1099-NEC reporting under §6041. Two exceptions: payments for legal services (always reportable) and payments for medical and health services (always reportable). For all other corporations, no 1099 is required, but you should still collect W-9 to confirm the corporate status.
My LLC paid a contractor through PayPal or Stripe. Do I still issue 1099-NEC?
If payment went through a third-party settlement organization that is itself a 1099-K filer (PayPal, Stripe, Square, etc.), you generally do not file 1099-NEC for that payment. The third-party platform handles the 1099-K to the contractor. Document which payments went through which channels at year-end so you do not double-report.
What if I missed the January 31 deadline?
Late filing penalties under §6721 range from $60 to $310 per return depending on lateness, capped annually at $664,500 (or $232,500 for small businesses). File as soon as you can, even after the deadline, to limit per-return penalties. Intentional disregard penalties are $660 per return with no cap.