U.S. Tax Withholding on Payments to Foreign Persons U.S. source income paid to foreign individuals amounts to $140 billion each year. Most types of U.S. source income paid to a foreign person are subject to a withholding tax of 30%, although a reduced rate or exemption may apply if stipulated in the applicable tax treaty.
General Rule
In general, a person that makes a payment of U.S. source income to a foreign person must withhold the proper amount of tax, report the payment on Form 1042-S and file a Form 1042 by March 15 of the year following the payment(s).
Withholding Agent
The person making the payment is considered to be the withholding agent. You are a withholding agent if you are a U.S.or foreign person that has control of any item of income of a foreign person that is subject to withholding.
A withholding agent may be an:
- Individual
- Corporation
- Partnership
- Trust
- Association
- Nominee (under section 1446 of the Code) or
- Any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies.
As a withholding agent, the payer is personally liable for any tax required to be withheld and which the payer fails to withhold.
A payment to a foreign person is subject to withholding if it is from sources within the United States, and it is either:
- Fixed or determinable annual or periodical ( FDAP) income, or
- Certain gains from the disposition of timber, coal, and iron ore or from the sale or exchange ofintangible property (such as patents or copyrights)
Examples of FDAP income subject to withholding include (but are not limited to):
- Interest
- Pensions and Annuities
- Alimony
- Real property income (such as rents).
- Royalties
- Taxable scholarships and fellowship grants
Withholding Agent Obligations
When you make a payment of U.S. source income to a foreign person or entity you are normally required to withhold U.S. income tax at a rate of 30% and report it on Forms 1042-S and 1042 by March 15 of the year following the payment(s).
The penalty for not filing Forms 1042-S and1042 when due (including extensions) is usually 5% of the unpaid tax for each month or part of a month the return is late, but not more than 25% of the unpaid tax. Additional penalties apply for failure to provide complete and correct information or if you fail to provide a complete and correct statement to each recipient. The maximum penalty is $100,000 per year.
More detailed information on this subject can be found in the links below. Contact us if you need more information for your particular situation. ddnelson@gmail.com
Links:
1042 Annual withholding tax return for US Source income of foreign persons
1042-S. Foreign persons U.S. source income subject to withholding
Non Resident Alien Withholding Information from www.irs.gov
Publication 515 Withholding of tax on nonresident aliens and foreign entities
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