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Federal Income Tax Withholding and Reporting on Other Kinds of U.S. Source Income Paid to Nonresident Aliens

Withhold Federal Tax on income other than wages paid to nonresident aliens, using the following rules:

Nonemployee Compensation

U.S. source nonemployee compensation for any amount in excess of zero is reportable on Form 1042-S. Withhold at 30% or lesser tax treaty rate if applicable (See Table 2 in IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, or Publication 901, U.S. Tax Treaties). The beneficial owner of the income will claim the benefit of the tax treaty article which deals with "Independent Personal Services", or with "Business Profits". The beneficial owner may claim the lesser tax treaty rate by filing Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with the withholding agent. The withholding agent will report the payment on Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, even if the entire amount of compensation is exempt under a tax treaty.

Exceptions to Mandatory Withholding of Federal Income Tax on Nonresident Aliens:

  1. IRC section 861(a)(3) / IRC section 864(b)(1) - Wages or Nonemployee Compensation is exempt from withholding of federal income tax if all 3 of the following conditions met:
    1. The nonresident alien performing services is present in the U.S. for a total not exceeding 90 days in a taxable year;
    2. The compensation for such services does not exceed $3,000; and
    3. The nonresident alien performs the services as an employee of, or under contract with, a nonresident alien individual, a foreign corporation, or a foreign partnership not engaged in a trade or business in the U.S. or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation, or a U.S. partnership (including from within a U.S. possession).
  2. IRC section 872(b)(3) - Wages or Nonemployee Compensation exempt from withholding of federal income tax if both of the following conditions are met:
    1. The nonresident alien is present in the U.S. in F, J, M, or Q nonimmigrant status; and
    2. The compensation for services is paid by a nonresident alien individual, a foreign corporation, or a foreign partnership or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation, or a U.S. partnership (including from within a U.S. possession).

 

Scholarships/Fellowships

U.S. source scholarships/fellowships are reportable only for amounts which are taxable. The taxable portion of a scholarship/fellowship is that portion which is not excludible from gross income as a "qualified scholarship" under IRC section 117. Withhold at 14% if the payee is in F, J, M, or Q nonimmigrant status. Withhold at 30% for payees in other nonimmigrant statuses. The student articles of some income tax treaties exempt scholarships/fellowships from U.S. income tax. (See Table 2 in IRS Publication 515 or 901.) The beneficial owner may claim the lesser tax treaty rate by filing Form W-8BEN with the withholding agent. The withholding agent will report the payment on Forms 1042 and 1042-S, even if the entire amount is exempt under a tax treaty.

Athletes & Entertainers

U.S. source personal service income paid to an individual athlete or entertainer is reportable on Form 1042-S for any amount in excess of zero. Withhold at 30% or lesser tax treaty rate if applicable (See Table 2 in IRS Publication 515 or 901). The beneficial owner of the income will claim the benefit of the tax treaty article that deals with "artistes, athletes or entertainers" or with "Independent Personal Services", if the treaty language allows it. The beneficial owner may claim the lesser tax treaty rate by filing Form 8233 with the withholding agent. The withholding agent will report the payment on Forms 1042 and 1042-S, even if the entire amount of compensation is exempt under a tax treaty.

If the payee is a sole proprietor using a dba (doing business as) name, follow the same rules as for an individual.

If the payee is a foreign corporation, a foreign partnership, or a group of foreign individuals using a dba, see Withholding Of Tax On Payments To Foreign Athletes And Entertainers.

Interest Income

If the interest income is paid by a U.S. bank, a U.S. savings & loan company, a U.S. credit union, or a U.S. insurance company to a nonresident alien, it is nontaxable and nonreportable (no 1099 or 1042-S reporting) unless the interest income is effectively connected with a U.S. trade or business. However, U.S. bank interest paid to a resident of Canada is reportable on Form 1042-S but is not subject to withholding (Treasury Regulation 1.6049-8(a)). If the interest income is &quotportfolio interest&quot and earned by a nonresident alien, then the interest income is reportable on Form 1042-S but nontaxable (Refer to Chapter 3 &quotExclusions From Gross Income&quot - &quotInterest Income&quot – &quotPortfolio interest&quot in Chapter 3 of Publication 519, U.S. Tax Guide for Aliens). If the interest income is from any other U.S. source and paid to a nonresident alien, please refer to Publication 515 for the correct treatment for the type of interest income involved. Withhold at 30% or lesser tax treaty rate, if applicable (See Table 1 in IRS Publication 515 or 901). The beneficial owner of the interest income may claim the benefit of the tax treaty article which deals with &quotInterest income.&quot The beneficial owner may claim the lesser tax treaty rate by filing Form W-8BEN with the withholding agent. The withholding agent will report the payment on Forms 1042 and 1042-S, even if the entire amount of income is exempt under a tax treaty.

 

A nonresident alien individual should not deliver Form W-9 to a U.S. bank, U.S. savings and loan association, U.S. credit union, or U.S. insurance company. Instead, he should deliver Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to such institutions in order to put them on notice that he is a nonresident alien and that the interest income accruing to his account at such institutions is not reportable to the IRS, except in the case of U.S. bank accounts held by residents of Canada.

Dividend Income

If the dividend income is from a U.S. source and paid to a nonresident alien, it is reportable for any amount in excess of zero. Withhold at 30% or lesser tax treaty rate (See Table 1 in IRS Publication 515 or 901). The beneficial owner of the income may claim the benefit of the tax treaty article which deals with &quotDividend Income.&quot The beneficial owner may claim the lesser tax treaty rate by filing Form W-8BEN with the withholding agent. The withholding agent will report the payment on Forms 1042 and 1042-S, even if the entire amount of income is exempt under a tax treaty.

Capital Gains

With certain exceptions, capital gains income is not usually taxable to a nonresident alien whose days of presence in the United States do not equal or exceed 183 days in a calendar year. However, refer to The Taxation of Capital Gains Of Nonresident Alien Students, Scholars and Employees of Foreign Governments for an exception to the general rule. If the capital gains income is taxable it is not usually subject to withholding. If the capital gains income is taxable, the beneficial owner of the capital gains income is required to report the gains on Form 1040NR. The beneficial owner of the income may claim the benefit of the tax treaty article which deals with &quotIncome from Gains&quot on his Form 1040NR. (See Table 1 in IRS Publication 515 or 901).

Royalties

If the royalties income is from a U.S. source and paid to a nonresident alien, then it is reportable for any amount in excess of zero. Withhold at 30% or lesser tax treaty rate, if applicable (See Table 1 in IRS Publication 515 or 901). The beneficial owner of the income may claim the benefit of the tax treaty article which deals with &quotRoyalties Income.&quot The beneficial owner may claim the lesser tax treaty rate by filing Form W-8BEN with the withholding agent. The withholding agent will report the payment on Forms 1042 and 1042-S, even if the entire amount of income is exempt under a tax treaty.

Pensions And Annuities

U.S. source income from pensions and annuities is reportable for any amount in excess of zero. Withhold at 30% or lesser tax treaty rate (See Table 1 in IRS Publication 515 or 901) on the taxable portion of a pension. The beneficial owner is allowed a deduction for his own investment in the contract, and the taxable portion of a pension is computed in the same manner as it would for a U.S. citizen. Refer to Publication 575, Pension and Annuity Income and  Publication 939, General Rule for Pensions and Annuities for more information. The beneficial owner of the income may claim the benefit of the tax treaty article which deals with &quotIncome from Pensions.&quot The beneficial owner may claim the lesser tax treaty rate by filing Form W-8BEN with the withholding agent. The withholding agent will report the payment on Forms 1042 and 1042-S, even if the entire amount of compensation is exempt under a tax treaty.

Social Security Pensions

85% of the U.S. Social Security pension paid to a nonresident alien is taxable at the rate of 30% (for an effective rate of tax of 25.5%). The Social Security Administration withholds 25.5% federal income tax on U.S. social security pensions paid to nonresident aliens and reports the income and the withholding on SSA’s own version of Forms 1042 and 1042-S. If the Social Security Administration fails to withhold U.S. federal income tax on the U.S. Social Security pension paid to a nonresident alien, the nonresident alien is required to report the U.S. Social Security pension on page 4 of Form 1040NR and to compute and pay the proper U.S. federal income tax on the pension. Social security pensions are exempt from U.S. federal income tax under some tax treaties.

Alimony

U.S. source alimony paid to a nonresident alien former spouse is reportable for any amount in excess of zero. Withhold at 30% or lesser tax treaty rate, if applicable (See Table 1 in IRS Publication 515 or 901). The beneficial owner of the income may claim the benefit of the tax treaty article which deals with &quotAlimony&quot (sometimes contained within another treaty article, or sometimes available by using the &quotother income&quot article of a tax treaty). The beneficial owner may claim the lesser tax treaty rate by filing Form W-8BEN with the withholding agent. The withholding agent will report the payment on Forms 1042 and 1042-S, even if the entire amount is exempt under a tax treaty.

Au Pair Wages

Wages paid to Au Pair Exchange Visitors generally are treated as wages paid to household employees. Refer to Au Pairs for more information.

H-2A Agricultural Workers

Wages paid to foreign agricultural workers temporarily present in the United States in H-2A nonimmigrant status are taxed and reported in a special way described in Withholding/Reporting on H-2A Agricultural Workers. Refer to Foreign Agricultural Workers for more information.

References/Related Topics

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

Page Last Reviewed or Updated: 23-Jan-2014