Federal Income Tax Withholding for Individuals Employed by a Foreign Person

 

The term foreign person means

  • An individual who is neither a U.S. citizen nor a U.S. resident within the meaning of Internal Revenue Code (IRC) section 7701(b)(1)(A),
  • 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 IRC section 7701(a)(31) for the definition of a foreign estate and a foreign trust.

The term U.S. resident means an individual who

U.S. citizens and U.S. residents employed by a foreign person

Wages paid to a U.S. citizen or resident 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 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 foreign earned income exclusion for which a employee is eligible to under IRC section 911. 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 their employer.

Note: In the case of wages paid to a United States resident, no exemption from income tax withholding is available for the amount of the exclusion for which the employee would be eligible to under IRC section 911.

Individuals who are neither U.S. citizens nor U.S. residents employed by a foreign person

Wages paid by a foreign person to an individual who is neither a U.S. citizen nor a U.S. resident within the meaning of IRC section 7701(b)(1)(A) 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 U.S. graduated tax rates and federal income tax withholding and reporting by the foreign employer. These wages are subject to special withholding rules 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 an individual who is neither a U.S. citizen nor a U.S. resident within the meaning of IRC section 7701(b)(1)(A) 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 individuals who are neither U.S. citizens nor U.S. residents within the meaning of IRC section 7701(b)(1)(A)

Per IRC section 861(a)(3) / IRC section 864(b)(1), wages or nonemployee compensation are exempt from withholding of federal income tax if all of the following conditions are met:

  1. The nonresident performing services is present in the U.S. for a total no more than 90 days 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 foreign corporation, a foreign partnership not engaged in a trade or business in the U.S., an individual who is neither a U.S. citizen nor a U.S. resident, or the foreign or U.S. territory office of a U.S. corporation, a U.S. partnership, or an individual who is a U.S. citizen or resident.

Per IRC section 872(b)(3), wages or nonemployee compensation are exempt from withholding of federal income tax if both the following conditions are met:

  1. The nonresident is present in the U.S. in F, J, M, or Q nonimmigrant status; and
  2. The compensation is paid by a foreign corporation, a foreign partnership, an individual who is neither a U.S. citizen nor a U.S. resident within the meaning of IRC section 7701(b)(1)(A) or by an office or place of business maintained in a foreign country or U.S. territory by a U.S. corporation, a U.S. partnership, or an individual who is a U.S. citizen or resident.

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.