Well, it is up to him to report the income, not you. You will issue
the freelancer a Statement of Earnings for the year and he will report
it on his 1040 as he normally would in U.S. currency (Schedule C
Business Profit and Loss).
1. His earnings are "US Source" because he performed the services in the US.
An explanation of "U.S. Source Income":
"All wages and any other compensation for services performed in the
United States are considered to be from sources in the United States."
2. He will report the income on his 1040 in US currency.
Foreign Currency and Currency Exchange Rates
"You must express the amounts you report on your U.S. tax return in
U.S. dollars. If you receive all or part of your income or pay some or
all of your expenses in foreign currency, you must translate the
foreign currency into U.S. dollars. How you do this depends on your
functional currency. Your functional currency generally is the U.S.
dollar unless you are required to use the currency of a foreign
3. You are correct about the 1099, only U.S. businesses can issue them
but it is up to you to issue some sort of a Statement of Earnings to
the freelancer. Since you are already sending him monthly statements,
you can use the same accounting software to issue one for the year.
That is all that is needed, otherwise if he doesn't receive one, he
can just declare the income on his 1040 on his own, using the monthly
statements that he already has. That's all there is to it.
I hope that is clear. If you have any questions, please post a
clarification request and wait for me to respond before closing/rating
I knew the answer but tried to find appropriate links for you.