U.S. NONRESIDENT WITHHOLDING TAX
Payments to foreign persons, including nonresident aliens (non-U.S. individuals), foreign corporations, foreign partnerships, foreign trusts and foreign estates, etc. may be subject to U.S. nonresident withholding tax. This is a general overview with information about 1) the persons responsible for withholding (withholding agents), 2) the types of income subject to withholding, and 3) the information return and tax return filing obligations of withholding agents. Nonresidents may be able to claim a refund for (part of) the U.S. nonresident withholding tax that was withheld on their U.S.-source income by filing a U.S. nonresident income tax return.
Who is responsible for withholding on U.S. nonresidents?
In most cases, a foreign person is subject to U.S. tax on his or her U.S.-source income. Most types of U.S.-source income received by a foreign person are subject to U.S. tax at a rate of 30%. A reduced rate may apply under the provisions of a tax treaty. The withholding agent is responsible the tax is withheld and paid to the IRS. The withholding agent is the U.S. or foreign person, in whatever capacity acting, that has control, receipt, custody, disposal, or payment of an amount that is subject to withholding.
Withholding agents are personally liable for any tax required to be withheld. This applies even if the foreign person to whom the payment is made does not owe any U.S. tax on his U.S.-source income. If the foreign person does owe U.S. tax on his U.S.-source income, both the foreign person as well as the withholding agent are liable for the tax, as well as interest and any applicable penalties.
What types of income are subject to U.S. nonresident withholding tax?
Most payments made to a foreign person are subject to U.S. withholding tax. For example, if a foreign person sells real property located in the United States, U.S. tax must be withheld on the payment to the foreign person. Similarly, generally, tax must be withheld on dividends, gains, royalties, rental income, pensions, as well as other types of income.
What are the information and tax return filing obligations of withholding agents?
Generally, a withholding agent is required to file a form or tax return with the IRS to document the amount withheld. Generally, Form 1042 and Form 1042-S is required to be filed. Form 8288 and Form 8288-A is required to report and pay over any tax withheld on the acquisition of U.S. real property interests. Other forms may be required for other types of income to report U.S. nonresident withholding tax.
Sanders US Tax Services specializes in preparing U.S. tax returns with foreign income and foreign assets. We have offices in Denver, Colorado, as well as Germany, the Netherlands and Switzerland. Contact us with any questions you may have about your withholding requirements on payments to U.S. nonresidents.