Do I withhold and issue Form 1042-S if my foreign contractor worked entirely outside the U.S. in 2026?

IRS Publication 515 (2026) sets out the source-of-services rule: only U.S.-source income is subject to NRA withholding, the source of personal-services income depends on where the services are performed, and compensation paid to a nonresident alien for services performed outside the United States is not subject to withholding.

When the contractor works partly inside and partly outside the U.S., income must be allocated based on facts and circumstances. But when 100% of the work is performed outside the U.S., the baseline IRS rule is that the payment is foreign-source compensation, not a chapter-3 withholding item — and a Form 1042-S would not normally be triggered for that payment.