Tax withholding types


Employment taxes

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:

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 a 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, the withholding rules that apply to pension payments to foreign persons (Chapter 3 withholding) take precedence over any other withholding rules that would apply to distributions from qualified plans and other qualified retirement arrangements. That is, in the absence of a treaty exemption, withholding at the statutory rate of 30% on the entire distribution that is from U.S. sources is generally applicable. However, if any portion of the pension distribution arises from personal services performed in the U.S. after December 31, 1966, that portion of the distribution is withheld upon at graduated rates.

Backup withholding

Generally, backup withholding applies only to U.S. citizens and resident aliens, and not to nonresident aliens (NRA).

The payor must backup withhold 24% 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 Taxpayer Identification Number (TIN) in the manner required,
  • The IRS notifies the payor 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, the presumption rules under chapters 3 and 61 generally require the payor to treat the payee as a non-exempt U.S. person.

Generally, to avoid backup withholding, a TIN must be provided by a U.S. non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification, when a payor is required to obtain a certified TIN from a payee. A payor files a tax return on Form 945, Annual Return of Withholding Federal Income Tax, to report the backup withholding.

A payor who neglects or refuses to do backup withholding when required will be held liable for the amount of the backup withholding which should have been withheld from any payments (plus any applicable interest, penalties, or additions to tax).

Persons subject to Chapter 3 or Chapter 4 withholding of the Internal Revenue Code

Chapter 3 withholding under sections 1441-1443 generally applies a 30% statutory rate of withholding to payments of FDAP income or gains from U.S. sources but only if the payments are not effectively connected with a U.S. trade or business and are paid to a payee that is a foreign person. It does not apply to payments made to U.S. persons, except in certain cases in which the U.S. person acts as an agent for a foreign person. Usually, the payee's classification and status as a U.S. or foreign person is determined based on the documentation that the payee provides to the withholding agent. See the Documentation section in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. However, if the withholding agent receives no documentation or cannot reliably associate all or a part of a payment with valid documentation, then the withholding agent must apply certain presumption rules to make these determinations.

If the withholding agent fails to withhold, the withholding agent may be held liable for the tax, plus any applicable penalties and interest. See section 1461. To the extent the tax is paid by the foreign person, the withholding tax will not be collected from the withholding agent. However, this does not relieve the withholding agent from liability for any applicable penalties and interest. See section 1463.

Chapter 4 withholding requires a withholding agent to withhold 30% on withholdable payments made to an entity that is a Foreign Financial Institution (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 an entity that is a passive non-financial foreign entity (NFFE) that fails to identify its substantial U.S. owners (or to 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 Intergovernmental Agreement (IGA), a similar agreed form) associated with the payment, or other documentation for payments made outside of the U.S. with respect to offshore obligations. See Treasury regulations section 1.1471-3(d) for details on these documentation requirements. Withholding under chapter 4 may also apply 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 of withholding on foreign persons under Chapter 3 and under Chapter 50 include:

  • Dispositions of U.S. real property interests (section 1445),
  • Withholding by partnerships on income effectively connected with the conduct of a U.S. trade or business (section 1446),
  • Withholding on dispositions of certain partnership interests (section 1446(f)), and
  • Withholding on specified Federal procurement payments (section 5000C).

More detailed information on these specific types of withholding may be found in the links below:

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 on or after May 1, 1986, visit the Opinions search page of the United States Tax Court.