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Information provided on this site is for general
guidance only and is often simplified. Actual
IRS procedures are complex, and taxpayers should
obtain professional assistance or use IRS sources
for complete information.
Withholding
Tax From Non-Resident Aliens
Non-resident
aliens are subject to tax on US source income
that is not effectively connected with a US trade
or business. The tax rate is 30%, unless modified
by a tax treaty.
Generally, anyone who pays or conveys an item
of US source income to an alien individual, or
to the individual's foreign or domestic agent,
is liable for the tax and must withhold.
A withholding agent is any person required to
withhold the tax. This may be an individual, trust,
estate, partnership, corporation, government agency,
association, or tax-exempt foundation whether
foreign or domestic. Withholding agents include
US citizens and residents. They also include foreign
nominees and fiduciaries that are residents of
treaty countries and must withhold additional
US tax under tax treaty provisions.
You
should withhold any required tax if facts indicate
that the individual, or the fiduciary, to whom
you are to pay the income is a nonresident alien.
However, in some cases, the nonresident alien
may be entitled to an exemption from withholding
or reduced rate of withholding. Tax need not be
withheld if an individual provides a written statement
that he or she is a resident or citizen of the
United States and there is no reason to believe
otherwise.
A US bank that pays income subject to withholding
may decide whether to accept an individual's proof
of US citizenship or residence given through a
foreign bank to which income is paid. If the U.S.
bank accepts this proof, it will not be liable
for payment of tax if later it is shown that the
individual was a non-resident alien. If it accepts
the proof, the US bank must file Form 1042-S showing
the name, address, identification number, and
the particular securities of the actual owner,
and indicating that it is relying on proof submitted
by the foreign bank as its basis for not withholding.
Generally,
all US source income received by a non-US person
is subject to withholding. The types of income
include but are not limited to the following:
-
Interest and dividends;
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Rents and royalties;
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Salaries, wages, and other compensation;
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Premiums, annuities, and pensions;
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Certain scholarships and grants.
Income
which is effectively connected with a US trade
or business of the recipient is exempt from withholding.
The recipient must file Form 4224, exemption From
Withholding of Tax on Income Effectively Connected
With the Conduct of a Trade or Business in the
United States, with the payor to exempt this income
from withholding. The recipient of effectively
connected income must file a tax return reporting
the income.
Income may be subject to reduced withholding under
a tax treaty. The foreign person can reduce the
amount that must be withheld by providing the
withholding agent with Form 1001, Ownership, Exemption,
or Reduced Rate Certificate. Upon receipt, the
withholding agent may begin withholding at the
reduced rate.
Withholding agents must file Form 1042 and Form
1042-S. Form 1042 is the withholding agent's return
showing amounts of income paid and taxes withheld.
A copy of Form 1042-S is sent to the recipient
showing the amount of income received and tax
withheld. Withholding agents must file Form 1042
and the associated Forms 1042-S by the March 15th
after the close of the calendar year. These forms
must be filed on a calendar year basis, regardless
of the withholding agent's tax year.
Form 1042 is a summary of all income paid and
tax withheld on persons subject to withholding.
It must be prepared in duplicate. The original
should be filed with the Philadelphia Service
Center and the copy retained by the withholding
agent. All amounts should be stated in US dollars.
Deposits of withheld taxes are governed by Regulation
section 1.6302-2. These rules provide for deposits
to be made at the end of any month when the total
accumulated withheld taxes are more than $200.
If the total for the year is less than $200, the
deposit should be made with Form 1042. If the
withholding agent accumulates more than $2,000
per week, he or she must make deposits on a weekly
basis.
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