Foreign person NRA tax withholding
Nonresident Alien NRA tax withholding is applicable to U.S sourced income paid to foreign person and does not apply to payments made to U.S. persons. Foreign persons include nonresident alien individual, foreign partnerships, foreign corporations, foreign estates, and foreign trusts. The tax generally must be withheld from the payment made to the foreign persons.
If you are a withholding agent, you are responsible for withholding tax on payments made to a foreign person and are generally personally liable for any tax required to be withheld and is subject to penalties and interest for failure to withhold.
What You Need to Know:
1. NRA withholding generally requires 30% withholding on payment of US sources income.
2. A reduced rate and exemption may apply if there is an existing tax treating between the US and NRAs country of residence.
3. Income is subject to withholding if it is fixed or determinable annual or periodical (FDAP) income. These are: interest, alimony, dividends, royalties, pensions and annuities, original issue discount, and compensation for personal services.
4. Requires filing of Form 1042-S to report payments subject to NRA withholding and file a tax return on Form 1042.
5. Payments to all foreign persons, including nonresident aliens, foreign entities and governments, could be subject to NRA withholding.
6. When to withhold: At the time you make payment to amount subject to withholding.
7. U.S. tax identification number TIN is generally requested from the payee by the withholding agent.
8. TIN could be: SSN, SS-5, ITIN, and EIN.
9. If the requirements for exceptions are met, a foreign person may not have to provide a US TIN. You may request a foreign TIN issued by NRAs country of residence.
10. Foreign person provides the withholding agent Form W-8 to claim for treaty benefits.
11. Form 1042-S information return reporting must be filed by every withholding agent to report payments to foreign persons for U.S source income even if there is no tax withheld or is exempt from tax under U.S. tax treaty.
12. A separate Form 1042-S is required for each type of income that was paid to the foreign person but only one Form 1042 has to be filed consolidating all Form 1042-S recipient information.
13. Total amount is less than $200: The Forms 1042 and 1042-S must be filed by March 15 of the year following the calendar year in which the income subject to reporting was paid. If total amount is more than $200, taxes should be deposited within 15 days after the end of the month.
14. Form 1042 is a calendar year tax return.
15. If Form 1042-S is filed on paper it must be filed with Form 1042-T for transmitting purposes.
16. Where to file: All forms are filed with the IRS Center in Ogden Service Center, P.O. Box 409101, Ogden Utah 84409.