By Anthony Diosdi
The United States taxes the gross amount of a foreign person’s U.S.-nonbusiness income at a flat rate of 30 percent. Any person having control, receipt, custody, disposal, or payment of an item of U.S. source income to a foreign person may have an obligation to withhold U.S. tax. A person who fails to withhold is liable for the uncollected tax. Consequently, anyone making payments to foreign persons or entities must ensure that the appropriate amount of tax is withheld and paid to the U.S. government.
An individual withholding taxes must deposit the funds with a Federal Reserve bank or an authorized financial institution using a federal tax deposit coupon or by electronic transfer. The individual must also file Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons and Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, for each foreign payee.
A U.S. payor of income may typically rely on a Form W-9 or Form W-8 to determine the country of residence. Withholding is usually not required for an individual or entity furnishing a Form W-9. A Form W-9 indicates that the recipient of the funds is a U.S. person. A W-9 contains a U.S. person’s taxpayer identification number. (A U.S. person’s taxpayer identification number is a social security number for individuals and employer identification number for entities).
On the other hand, withholding is typically required if a foreign person furnishes a Form W-8. There are a number of different types of Forms W-8. The most common Form W-8 is a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. A foreign individual typically utilizes a Form W-8BEN for the following: 1) establishing foreign status; or 2) claim a reduction in withholding under an applicable income tax treaty.
If a foreign individual or entity fails to provide a Form W-9 or W-8BEN, withholding may be necessary. Anyone paying a foreign individual or entity should determine if withholding is necessary and request adequate documentation, such as a Form W-9 or W-8BEN. Failure to do so can result in liability for any uncollected tax as well as interest and penalties.
Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.
He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or email@example.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.
By Anthony Diosdi