If you are the payer of the corresponding income, you are considered the withholding agent. In general, according to the Internal Revenue Service (IRS) definition, a withholding agent is “a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding”. You, as an individual, can be considered a withholding agent, or your business, set up as a partnership or corporation, could be a withholding agent. Any other type of legal entity, including foreign intermediaries, foreign partnerships, or U.S. branches of foreign banks or insurance companies could also be withholding agents.
You may be considered a withholding agent even if you are not specifically required to withhold tax from a payment, or even if another person has withheld tax. More than one person or entity may be considered a withholding agent for the same income, even though the tax only has to be withheld once. For example, a flow-through entity may know, or have reason to know that the full amount of tax was not withheld by the person who paid the income. The flow-through entity, as a withholding agent, is then responsible for withholding the tax.
Personal Liability
The importance of being considered a withholding agent is that you are personally liable for the tax that must be withheld. And your liability is independent of the tax liability of the foreign person who received the income. If you do not withhold the tax, and the foreign person does not meet its U.S. tax liability, both of you are liable for the tax, plus any penalties and interest that may apply. Even if the foreign person subsequently pays the tax, you could be liable for the penalties and interest for your failure to withhold.
U.S. Agent of a Foreign Person
If you pay income to a U.S. person who is acting as an agent for a foreign person, as defined above, and you have knowledge of this, you are also responsible for withholding tax on the payment, as if the payment were being made directly to the foreign person. There is an exception if the payment is being made to a financial institution and you have no reason to believe that the institution will not fulfill its obligation to withhold the tax.