You should withhold 30% of the gross amount of the income payment that is subject to tax, without taking into account any deductions. If the source of the income or the amount subject to tax cannot be definitively determined at the time of payment, you should withhold an amount sufficient to ensure that the 30% requirement is satisfied, once the source and taxable amount of income are determined. But you should not withhold more than 30% of the total amount paid. For example, if you are not sure that the entire amount will be U.S. source income at the time you make the payment, you should withhold 30%. Then, if it is determined that part of the income is not U.S. source, the 30% you withheld will be more than sufficient to cover the obligation. And, if you make more than one payment and you withhold 30% on each payment, and it is subsequently determined that not all the payments you made are U.S. source taxable income, you will have withheld more than enough tax.
When To Withhold
You are required to withhold tax at the time you make payment of the income that is subject to tax withholding. Payment is considered to have been made to a person if it is made to a third party for the person’s benefit, for example in payment of the person’s debt, or if it is made to the person’s agent. So, there does not necessarily have to be an actual transfer of cash or property to the foreign person for a withholding obligation to exist.
If you are a U.S. partnership, you must withhold tax from distributions that include amounts that are subject to withholding. But, if you have a foreign partner whose share of income subject to withholding is not actually distributed, you must still pay the 30% tax on the date you provide or send the foreign partner a Schedule K-1 (Form 1065) or on the due date for filing that schedule, whichever is earlier. A similar obligation exists for a U.S. trust. If the trust distributes its net income, it must withhold tax on a foreign beneficiary’s income. And, if a distribution is not made, the tax must be withheld on the foreign beneficiary’s allocable share.
Reporting
Payments you make that are subject to NRA withholding tax are reported on Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. An annual tax return must be filed on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
You may also be responsible for backup withholding on payments that are reported on Form 1099. Normally, payments reportable on 1099 forms would be subject to backup withholding if the payee does not provide you with a taxpayer identification number, for example. But you may also be responsible for backup withholding tax at a rate of 28% if you make payments to a foreign intermediary or a flow-through entity that collects income for a U.S. person subject to 1099 reporting. Backup withholding for the year is reported on Form 945, Annual Return of Withheld Federal Income Tax.
If the foreign entity provides you with one of the forms from the W-8 series, which are used to certify reduced withholding tax rates or exemption form U.S. income tax withholding for foreign persons, you do not have to withhold tax, or issue a Form 1099. The forms used to exempt the foreign persons include Forms W-8BEN, W-8ECI, and W-8EXP.