Federal Income Tax Withholding for Persons Employed by a Foreign Person
The term foreign person means
- A nonresident alien individual,
- A corporation created or organized in a foreign country or under the laws of a foreign country,
- A partnership created or organized in a foreign country or under the laws of a foreign country,
- A foreign trust,
- A foreign estate, and
- Any other person that is not a U.S. person.
See Internal Revenue Code section 7701(a)(31) for the definition of a foreign estate and a foreign trust.
U.S. citizens and resident aliens employed by a foreign person
Wages paid to a U.S. citizen or resident alien for services performed outside the United States for a foreign employer are subject to U.S. federal income tax. However, such wages are not subject to the U.S. federal income tax withholding to the extent that such wages are already subject to the income tax withholding of a foreign country.
Wages are subject to withholding to the extent that they exceed the amount of the exclusion that the employee is entitled to under IRC section 911 (Refer to International Taxpayer - Foreign Earned Income Exclusion ). To claim the exemption from withholding under IRC section 911 a U.S. citizen employee must file Form 673, Statement for Claiming Benefits Provided by Section 911, with his/her employer.
Note: In the case of wages paid to a United States resident alien, no exemption from income tax withholding is available for the amount of the exclusion that the employee would be entitled to under IRC section 911.
Nonresident aliens employed by a foreign person
The wages paid by a foreign person to a nonresident alien with respect to services performed in the United States are effectively connected with the conduct of a trade or business in the United States. These wages are subject to the U.S. graduated tax rates and federal income tax withholding and reporting by the foreign employer. These wages are subject to special withholding rules for nonresident aliens found in Chapter 9 of Publication 15 (Circular E), Employer's Tax Guide. In addition, these wages may be exempt from withholding under an income tax treaty.
The wages paid by a foreign person to a nonresident alien with respect to services performed outside of the United States are foreign source income and are not subject to reporting and withholding of U.S. federal income tax.
Exceptions to mandatory withholding of federal income tax on nonresident aliens
IRC 861(a)(3) / IRC 864(b)(1)-Wages or Nonemployee Compensation are exempt from withholding of federal income tax if all 3 of the following conditions are met:
- The nonresident alien performing services is present in the U.S. for a total not exceeding 90 days in a taxable year;
- The compensation for such services does not exceed $3,000; and
- 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).
IRC 872(b)(3)- Wages or Nonemployee Compensation are exempt from withholding of federal income tax if both the following 2 conditions are met:
- The nonresident alien is present in the U.S. in F, J, M, or Q nonimmigrant status; and
- 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).
Sections 3401, 3402, and 3403 of the Internal Revenue Code
Income Tax Regulations 31.3401(a)-1 et seq; 31.3402(a)-1 et seq; and 31.3403-1.
Income Tax Regulation 1.1441-1(c)(2) for the definition of a foreign person
Section 7701(a)(31) for the definition of a foreign estate and a foreign trust
Revenue Ruling 75-485 on the U.S. and Foreign Payment of a U.S. Citizen-Employee Abroad
Revenue Ruling 92-106 on Withholding / Reporting on Wages for Services Performed Within and Outside the United States
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.