IRS Logo
Print - Click this link to Print this page

U.S. Tax Withholding on Payments to Foreign Persons

International Tax Gap Series

March 2008

U.S. Tax Withholding on Payments to Foreign Persons

WASHINGTON - 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.

In order to remind payers of their withholding obligations, this fact sheet, the second in a series relating to the international tax gap, explains the rules for proper withholding and information reporting of U.S. source income paid to foreign persons.

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:

Important note: As a withholding agent, the payer is personally liable for any tax required to be withheld, independent of the tax liability of the foreign person to whom the payment is made.

Income Subject to Withholding

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 of intangible property (such as patents or copyrights)

Examples of FDAP income subject to withholding include (but are not limited to):

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.

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

 

Return to:  
The International Tax Gap Series

Page Last Reviewed or Updated: 05-Mar-2014