Tax Withholding Types
For information on withholding and employment taxes on payments to foreign persons located in the U.S. and U.S. persons abroad, refer to the following:
- Pay for Personal Services Performed
- Federal Income Tax Withholding
- Social Security Tax / Medicare Tax and Self-Employment
- Federal Unemployment Tax
Pensions and Annuity Withholding
Generally, pension and annuity payments are subject to federal income tax withholding. The withholding rules apply to the taxable part of payments from an employer pension annuity, profit-sharing, stock bonus, or other deferred compensation plan. The rules also apply to payments from an Individual Retirement Arrangement (IRA), an annuity, endowment, or life insurance contract issued by a life insurance company. There is no withholding on any part of a distribution that is not expected to be includible in the recipient's gross income.
Generally, backup withholding applies only to U.S. citizens, resident aliens and not to nonresident aliens (NRA).
The payer must backup withhold 28% from a reportable payment made to a U.S. person that is subject to Form 1099 reporting if:
- The U.S. person has not provided its TIN in the manner required,
- The IRS notifies you that the TIN furnished by the payee is incorrect,
- There has been a notified payee under-reporting,
- There has been a payee certification failure, or
- If the status of the payee as a foreign person or a U.S. person cannot be determined, under IRC section 1441 regulations – Presumption Rules
The payer who neglects or refuses to do backup withholding when required will himself be held liable for the amount of the backup withholding which should have been withheld from any payments.
Persons Subject to Chapter 3 or Chapter 4 Withholding of the Internal Revenue Code
Chapter 3 withholding applies only to payments made to a payee that is a foreign person. It does not apply to payments made to U.S. persons.
Usually, you determine the payee's status as a U.S. or foreign person or, if you are making a withholdable payment to an entity, or are a foreign financial institution (FFI) making a payment to an account holder, the payee's chapter 4 status, based on the documentation that person provides. See the Documentation section in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation upon which you can rely, then you must apply certain presumption rules.
Chapter 4 withholding applies to withholdable payments made to an entity payee that is an FFI unless the withholding agent is able to treat the FFI as a participating FFI, deemed-compliant FFI, or exempt beneficial owner. Chapter 4 withholding also applies to withholdable payments made to a passive NFFE that fails to identify its substantial U.S. owners (or certify that it does not have any substantial U.S. owners). You must establish the payee’s chapter 4 status to determine if withholding applies by applying the documentation requirements of chapter 4, generally by obtaining a Form W-8 (or, under an applicable IGA, a similar agreed form) associated with the payment, or other documentation for payments made outside of the United States on offshore obligations. See Treasury regulations section 1.1471-3(d) for details on these documentation requirements. Withholding under chapter 4 also applies to account holders of a participating FFI or registered deemed-compliant FFI that the FFI is required to treat as recalcitrant account holders.
The section titled "Persons Subject to Chapter 3 or Chapter 4 Withholding" in Publication 515 applies to both chapters 3 and 4, except where otherwise indicated and except where the text clearly applies to one or the other (e.g., reduced rates and exemptions under income tax treaties).
Other areas related to IRC Chapter 3 withholding are dispositions of U.S. real property interests and the withholding by partnerships on income effectively connected with the active conduct of a U.S. trade or business. They are discussed in separate areas as shown below.
- NRA Withholding -Withholding on payments of U.S. source income to foreign persons.IRC section 1441 to 1443 (Form 1042)
- Withholding of Tax on Dispositions of United States Real Property Interests - FIRPTA. IRC section 1445
- Partnership Withholding - Withholding Tax on Foreign Partners' Share of Effectively Connected Income. IRC section 1446
- Tax Withholding on Foreign Persons
- Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
- Publication 1281, Backup Withholding For Missing And Incorrect Name/TIN(S) (PDF)
- Publication 505, Tax Withholding and Estimated Tax
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.