Withholding Tax for Foreigners

published May, 2010

If you’re paying a foreigner, you may be required to withhold up to 30% for US Taxes.

Unfortunately, this area of taxation is complex…I might even call it a mess.

If you’re paying a foreigner for services, the way to report the payment depends on where the income was earned. If the services are performed IN the US, they are *probably* subject to a 30% withholding. If the same services are performed completely OUTSIDE the US, there is *probably* NO withholding requirement, BUT you should have some form of documentation that the person you’ve paid is actually located outside the US. Find Form W-8ECI at www.irs.gov/pub/irs-pdf/fw8eci.pdf and have your payee complete the form. (We could just say everyone we’re paying is outside the US, therefore not subject to the withholding rules, eh?)

You’ll also need to have a set of the W-89BEN and 1042S and 1042 for payment of services to a foreigner if they performed work WITHIN the US (see link below).

For non-services, things like Dividends, rents, interest and royalties, these ARE subject to the withholding rules. This is called FDAP income (this does not include capital gains nor tax exempt muni bond payments). FDAP stands for Fixed or Determinable, Annual or Periodic payments, as opposed to pay for services. When FDAP is paid from US Source activities, you’ll need to get form W-8BEN at www.irs.gov/pub/irs-pdf/fw8ben.pdf and then produce a Form 1042S and send a copy to the payee, plus send a Form 1042 to the IRS. The 1042S and 1042 are roughly equalivalent to the Forms 1099 and 1096 given to non-Foreigners.

The part that gets really complex is that international tax treaties can alter both the kinds of income that are subject to withholding, and the % of any required withholding.

For more information, please see IRS Publication 515 at www.irs.gov/pub/irs-pdf/p515.pdf or call us.