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

 

Withhold federal tax on income other than wages paid to nonresidents 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. Compensation for Personal Services Performed in United States Exempt from U.S. Income Tax Under Income Tax Treaties listed on the Tax Treaty Tables page on IRS.gov, IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, or IRS Publication 901, U.S. Tax Treaties).The beneficial owner of the income may 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 Nonresidents:

  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 three of the following conditions met: 
    1. The nonresident performing services is present in the U.S. for a total of ninety (90) days or less in a taxable year;
    2. The compensation for such services does not exceed $3,000; and
    3. The  nonresident performs the services as an employee of, or under contract with, a nonresident 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 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 is present in the U.S. on an F, J, M, or Q visa; and
    2. The compensation for services is paid by a nonresident individual, a foreign corporation, or a foreign partnership or the foreign office of a U.S. citizen or resident 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. The withholding rate on scholarships/fellowships for payees in F, J, M, or Q visa is 14% and for nonimmigrant payees in other nonimmigrant statuses is 30%. The student articles of some income tax treaties exempt scholarships/fellowships from U.S. income tax. (See Chart C, Withholding Tax Rates for Purposes of Chapter 3, in IRS Publication 515 as well as IRS Publication 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 IRS Publication 515 and Publication 901). The beneficial owner of the income may 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, 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 portfolio interest and earned by a nonresident, then the interest income is reportable on Form 1042-S but nontaxable (Refer to Chapter 3 "Exclusions From Gross Income" - "Interest Income" – "Portfolio Interest" 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, 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 Chart C, Withholding Tax Rates for Purposes of Chapter 3, in IRS Publication 515 as well as IRS Publication 901.) The beneficial owner of the interest income may claim the benefit of the tax treaty article which deals with "Interest Income." 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 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 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, it is reportable for any amount in excess of zero. Withhold at 30% or lesser tax treaty rate (see Chart C, Withholding Tax Rates for Purposes of Chapter 3, in IRS Publication 515 as well as IRS Publication 901.) The beneficial owner of the income may claim the benefit of the tax treaty article which deals with "Dividend Income." 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 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 1040-NR. The beneficial owner of the income may claim the benefit of the tax treaty article which deals with "Income from Gains" on his Form 1040NR. (See IRS Publication 515 and Publication 901).

Royalties

If the royalty income is from a U.S. source and paid to a nonresident, then it is reportable for any amount in excess of zero. Withhold at 30% or lesser tax treaty rate, if applicable (see Chart C, Withholding Tax Rates for Purposes of Chapter 3, in IRS Publication 515 as well as IRS Publication 901). The beneficial owner of the income may claim the benefit of the tax treaty article which deals with "Royalties Income." 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 (see Chart C, Withholding Tax Rates for Purposes of Chapter 3, in IRS Publication 515 as well as IRS Publication 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 "Income from Pensions." 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

Eighty-five percent of the U.S. Social Security pension paid to a nonresident 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 nonresidents 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, the nonresident 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 former spouse is reportable for any amount in excess of zero. Withhold at 30% or lesser tax treaty rate, if applicable (see IRS Publication 515 and Publication 901). The beneficial owner of the income may claim the benefit of the tax treaty article which deals with "Alimony" (sometimes contained within another treaty article, or sometimes available by using the "Other Income" 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.


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.