Publication 515 |
2000 Tax Year |
Withholding on Specific Income
Different kinds of income are subject to different withholding
requirements.
Effectively Connected Income
Generally, when a foreign person engages in a trade or business in
the United States, all income from sources within the United States
other than fixed or determinable annual or periodical (FDAP) income,
discussed earlier, is considered effectively connected with a U.S.
business. FDAP income may or may not be effectively connected with a
U.S. business. For example, effectively connected income includes
rents from real property if the alien chooses to treat that income as
effectively connected with a U.S. trade or business.
The factors to be considered in establishing whether FDAP income
and similar amounts are effectively connected with a U.S. trade or
business include:
- Whether the income is from assets used in, or held for use
in, the conduct of that trade or business, or
- Whether the activities of that trade or business were a
material factor in the realization of the income.
Income from securities.
There is a special rule for determining whether income from
securities is effectively connected with the active conduct of a U.S.
banking, financing, or similar business.
When the foreign person's U.S. office actively and materially
participates in soliciting, negotiating, or performing other
activities required to arrange the acquisition of securities, the U.S.
source interest or dividend income from the securities (or gain or
loss from their sale or exchange) is attributable to the U.S. office.
Withholding exemption.
Generally, you do not need to withhold tax on income if you receive
a Form W-8ECI on which a foreign payee represents that:
- The foreign payee is the beneficial owner of the income,
- The income is effectively connected with the conduct of a
trade or business in the United States, and
- The income is includible in the recipient's gross
income.
This withholding exemption applies to income for services performed
by a foreign partnership or foreign corporation (unless item (4) below
applies to the corporation). The exemption does not apply, however,
to:
- Pay for personal services performed by an individual,
- Effectively connected taxable income of a partnership that
is allocable to its foreign partners, (See Partnership
Withholding on Effectively Connected Income, later.)
- Income from the disposition of a U.S. real property
interest, (See U.S. Real Property Interest, later.)
or
- Payments to a foreign corporation for personal services if
all of the following apply:
- The foreign corporation otherwise qualifies as a personal
holding company for income tax purposes,
- The foreign corporation receives amounts under a contract
for personal services of an individual whom the corporation has no
right to designate, and
- 25% or more in value of the outstanding stock of the foreign
corporation at some time during the tax year is owned, directly or
indirectly, by or for an individual who has performed, is to perform
or may be designated as the one to perform, the services called for
under the contract.
Notional principal contract income.
Payment of an amount attributable to a notional principal contract
is not subject to NRA withholding regardless of whether a Form
W-8ECI is provided. However, income from a notional principal
contract is subject to reporting on Form 1042-S if it is
effectively connected with the conduct of a trade or business in the
United States. You must treat the income as effectively connected with
a U.S. trade or business if you pay the income to, or to the account
of, a qualified business unit (a branch) of a foreign person located
in the United States, or a qualified business unit located outside the
United States and you know, or have reason to know, the income is
effectively connected with the conduct of a U.S. trade or business.
You do not need to treat notional principal contract income as
effectively connected if you receive a Form W-8BEN that
represents that the income is not effectively connected with the
conduct of a U.S. trade or business or if the payee provides a
representation in a master agreement or in the confirmation on the
particular notional principal contract transaction that the payee is a
U.S. person or a non-U.S. branch of a foreign person.
Income paid to U.S. branch of foreign bank or insurance
company.
A payment to a U.S. branch of a foreign bank or a foreign insurance
company that is subject to U.S. regulation by the Federal Reserve or
state insurance authorities is presumed to be effectively connected
with the conduct of a trade or business in the United States unless
the branch provides a Form W-8BEN or Form W-8IMY for the
income. If a U.S. branch of a foreign bank or insurance company
receives income that the payer did not withhold upon because of the
presumption that the income was effectively connected with the U.S.
branch's trade or business, the U.S. branch is required to withhold on
the income if it is in fact not effectively connected with the conduct
of its trade or business in the United States. Withholding is required
whether the payment was collected on behalf of other persons or on
behalf of another branch of the same entity.
Income Other Than Effectively Connected Income
This section discusses the specific types of income that are
subject to NRA withholding. The income codes contained in this section
correspond to the income codes used on Form 1042-S (discussed
later), and in most cases, on Tables 1 and 2 found at the
end of this publication.
You must withhold tax at the statutory rates shown in Chart C
unless a reduced rate or exemption under a tax treaty applies. For
U.S. source gross income that is not effectively connected with a U.S.
trade or business, the rate is usually 30%. Generally, you must
withhold the tax at the time you pay the income to the foreign person.
See When to withhold, earlier.
Chart C. Withholding Tax Rates
Interest
Interest from U.S. sources paid to foreign payees is subject to NRA
withholding. When making a payment on an interest bearing obligation,
you must withhold on the gross amount of stated interest payable on
the interest payment date, regardless of whether the payment or a
portion of the payment may be a return of capital rather than
interest.
A substitute interest payment made to the transferor of a security
in a securities lending transaction or a sale-repurchase transaction
is treated the same as the interest on the transferred security.
Interest paid by U.S. obligors--general
(Income Code 1).
With specific exceptions, such as portfolio interest, you must
withhold on interest paid or credited on bonds, debentures, notes,
open account indebtedness, governmental obligations, certain deferred
payment arrangements (as provided in section 483 of the Internal
Revenue Code) or other evidences of indebtedness of U.S. obligors.
U.S. obligors include the U.S. Government or its agencies or
instrumentalities, any U.S. citizen or resident, any U.S. corporation,
and any U.S. partnership.
If, in a sale of a corporation's property, payment of the bonds or
other obligations of the corporation is assumed by the buyer, that
buyer, whether an individual, partnership, or corporation, must deduct
and withhold the taxes that would be required to be withheld by the
selling corporation as if there had been no sale or transfer. Also, if
interest coupons are in default, the tax must be withheld on the gross
amount of interest whether or not the payment is a return of capital
or the payment of income.
A resident alien individual paying interest on a margin account
maintained with a nonresident foreign brokerage firm must withhold
from the interest whether the interest is paid directly or
constructively.
Interest on bonds of a U.S. corporation paid to a foreign
corporation not engaged in a trade or business in the United States is
subject to NRA withholding even though the interest is guaranteed by a
foreign corporation that made payment outside the United States.
Domestic corporations must withhold on interest credited to foreign subsidiaries.
Original issue discount
(Income Code 30).
Original issue discount paid on the redemption of an obligation is
subject to NRA withholding. Original issue discount paid as part of
the purchase price of an obligation sold or exchanged, other than in a
redemption, is not subject to NRA withholding unless the purchase is
part of a plan the principal purpose of which is to avoid tax and the
withholding agent has actual knowledge or reason to know of the plan.
Withholding by a person other than the issuer of an obligation (or the
issuer's agent) is not required unless the obligation is issued after
December 31, 2000.
The amount of original issue discount subject to NRA withholding is
the taxable amount of original issue discount. The taxable amount is
the amount of original issue discount that accrued while the
obligation was held by the foreign beneficial owner up to the time the
obligation was sold or exchanged or a payment was made, reduced by any
amount of original issue discount that was previously taxed. If a
payment was made, the tax due on the original issue discount may not
exceed the amount of the payment reduced by the tax imposed on the
portion of the payment that is qualified stated interest.
If you cannot determine the taxable amount, you must withhold on
the entire amount of original issue discount accrued from the date of
the issue until the date of redemption (or sale or exchange, if
subject to NRA withholding) determined on the basis of the most
recently published Publication 1212,
List of Original Issue
Discount Instruments.
For more information on original issue discount, see Publication 550,
Investment Income and Expenses.
Reduced Rates of
Withholding on Interest
Certain interest is subject to a reduced rate of, or exemption
from, withholding.
Portfolio interest.
Interest and original issue discount that qualifies as portfolio
interest is not subject to NRA withholding. To qualify as portfolio
interest, the interest must be otherwise subject to NRA withholding,
must be paid on obligations issued after July 18, 1984, and must meet
certain other requirements.
Obligations not in registered form.
Interest on an obligation that is not in registered form (bearer
obligation) is portfolio interest if the obligation is
foreign-targeted. A bearer obligation is foreign-targeted if:
- There are arrangements to ensure that the obligation will be
sold, or resold in connection with the original issue, only to a
person who is not a United States person,
- Interest on the obligation is payable only outside the
United States and its possessions, and
- The face of the obligation contains a statement that any
United States person who holds the obligation will be subject to
limits under the United States income tax laws.
Documentation is not required for interest on bearer obligations to
qualify as portfolio interest. In some cases, however, you may need
documentation for purposes of Form 1099 reporting and backup
withholding.
Obligations in registered form.
Portfolio interest includes interest paid on an obligation that is
in registered form, and for which you have received documentation that
the beneficial owner of the obligation is not a United States person.
If the registered obligation is not targeted to foreign
markets, you must receive documentation on which you may rely to
treat the payee as a foreign person that is the beneficial owner of
the interest. The documentation required is a valid Form W-8BEN
(a valid Form W-8EXP from an entity that completes the Form
W-8EXP for other purposes is also acceptable) or, if allowable,
valid documentary evidence. See Documentation, earlier.
A registered obligation is targeted to foreign markets
if it is sold (or resold in connection with its original issuance)
only to foreign persons or to foreign branches of U. S. financial
institutions in accordance with procedures similar to those provided
under section 1.163-5(c)(2)(i) of the regulations. However, the
procedure that requires the obligation to be offered for sale (or
resale) only outside the United States does not apply if the
registered obligation is offered for sale through a public auction.
Also, the procedure that requires the obligation to be delivered
outside the United States does not apply if the obligation is
considered registered because it may be transferred only through a
book entry system and the obligation is offered for sale through a
public auction. The documentation needed depends on whether the
interest is paid to a financial institution, a member of a clearing
organization, or to some other foreign person.
Interest that does not qualify as portfolio interest.
Payments to certain persons and payments of contingent interest do
not qualify as portfolio interest. You must withhold at the statutory
rate on such payments unless some other exception, such as a treaty
provision applies.
Ten-percent owners.
Interest paid to a foreign person that owns 10% or more of the
total combined voting power of all classes of stock of a corporation,
or 10% or more of the capital or profits interest in a partnership,
that issued the obligation on which interest is paid is not portfolio
interest. Generally, the constructive ownership of stock rules apply
in determining if a person is a 10% shareholder of a corporation.
Banks.
Except in the case of interest paid on an obligation of the United
States, interest paid to a bank on an extension of credit made
pursuant to a loan agreement entered into in the ordinary course of
the bank's trade or business does not qualify as portfolio interest.
Controlled foreign corporations.
Interest paid to a controlled foreign corporation from a person
related to the controlled foreign corporation is not portfolio
interest.
Contingent interest.
Portfolio interest generally does not include contingent interest.
Contingent interest is interest that is determined by reference to any
of the following.
- Any receipts, sales, or other cash flow of the debtor or
related person.
- Income or profits of the debtor or related person.
- Any change in value of any property of the debtor or a
related person.
- Any dividend, partnership distributions, or similar payments
made by the debtor or a related person.
The term "related person" is defined in section
871(h)(4)(B) of the Internal Revenue Code.
The contingent interest rule does not apply to any interest paid or
accrued on any indebtedness with a fixed term that was issued:
- On or before April 7, 1993, or
- After April 7, 1993, pursuant to a written binding contract
in effect on that date and at all times thereafter before that
indebtedness was issued.
Interest on real property mortgages
(Income Code 2).
Because a treaty (for example, the U.S.--Egypt treaty) may
not permit a reduced rate or exemption for interest paid or credited
on real property mortgages, it is assigned a separate category for
withholding purposes. Interest on real property mortgages is interest
paid on any type of debt instrument that is secured by a mortgage or
deed of trust on real property located in the United States,
regardless of whether the mortgagor (or grantor) is a U.S. citizen or
a U.S. business entity.
Interest paid to controlling foreign corporations
(Income Code 3).
Because a treaty (for example, the U.S.--Greece treaty) may
not permit a reduced rate or exemption for interest paid by a domestic
corporation to a controlling foreign corporation, it is assigned a
separate category. The interest may be on any type of debt including
open or unsecured accounts payable, notes, certificates, bonds, or
other evidences of indebtedness. A controlling foreign corporation is
a corporation of the treaty country that controls, directly or
indirectly, more than 50% of the entire voting power of the paying
corporation.
Interest paid by foreign corporations
(Income Code 4).
If a foreign corporation is engaged in a U.S. trade or business,
any interest paid by the foreign corporation's trade or business in
the United States (branch interest) is subject to NRA withholding as
if paid by a domestic corporation (without considering the "payer
having income from abroad" exception). As a result, the interest
paid to foreign payees is generally subject to NRA withholding. In
addition, if "allocable interest" exceeds the branch interest
paid, the excess interest is also subject to tax and reported on the
foreign corporation's income tax return, Form 1120-F. See
Instructions for Form 1120-F for more information.
If there is no treaty provision that reduces the rate of
withholding on branch interest, you must withhold tax at the statutory
rate of 30% on the interest paid by a foreign corporation's U.S. trade
or business.
In general, payees of interest from a U.S. trade or business of a
foreign corporation are entitled to reduced rates of, or exemption
from, tax under a treaty in the same manner and subject to the same
conditions as if they had received the interest from a domestic
corporation. However, a foreign corporation that receives interest
paid by a U.S. trade or business of a foreign corporation must also be
a qualified resident of its country of residence to be entitled to
benefits under that country's tax treaty. If the foreign corporation
is a resident of a country that has entered into an income tax treaty
since 1987 that contains a limitation on benefits article, the foreign
corporation need only satisfy the limitation on benefits article in
that treaty to qualify for a reduced rate of tax.
Alternatively, a payee may be entitled to treaty benefits under the
payor's treaty if there is a provision in that treaty that applies
specifically to interest paid by the payor foreign corporation. This
provision may exempt all or a part of this interest. Some treaties
provide for an exemption regardless of the payee's residence or
citizenship, while others provide for an exemption according to the
payee's status as a resident or citizen of the payor's country.
A foreign corporation that pays interest must be a qualified
resident (under section 884 of the Internal Revenue Code) of its
country of residence for the payor's treaty to exempt payments from
tax by the foreign corporation. However, if the foreign corporation is
a resident of a country that has entered into an income tax treaty
since 1987 that contains a limitation on benefits article, the foreign
corporation need only satisfy the limitation on benefits article in
that treaty to qualify for the exemption.
Interest on deposits
(Income Code 29).
Foreign persons are not subject to withholding on interest that is
not connected with a U.S. trade or business if it is from:
- Deposits with persons carrying on the banking
business,
- Deposits or withdrawable accounts with savings institutions
chartered and supervised under federal or state law as savings and
loan or similar associations, such as credit unions, if the interest
is or would be deductible by the institutions, or
- Amounts left with an insurance company under an agreement to
pay interest on them.
Deposits include certificates of deposit, open account time
deposits, Eurodollar certificates of deposit, and other deposit
arrangements.
The deposit interest exception does not require a Form
W-8BEN. However, a Form W-8BEN may be required for
purposes of Form 1099 reporting and backup withholding.
You may have to file Form 1042-S to report certain payments
of interest on deposits. See Deposit interest paid to alien
individuals who are residents of Canada under Returns
Required, later.
Interest from foreign business arrangements.
In general, interest received from a resident alien individual or a
domestic corporation is not subject to NRA withholding if at least 80%
of the payer's gross income from all sources has been from active
foreign business for the 3 tax years of the payer before the year in
which the interest is paid, or for the applicable part of those 3
years. Active foreign business income is gross income which is:
- Derived from sources outside the United States, and
- Attributable to the active conduct of a trade or business in
a foreign country or possession of the United States by the individual
or corporation.
However, limits apply if the recipient is considered to be a
related person (see section 861(c) of the Internal Revenue Code). A
foreign beneficial owner does not need to provide a Form W-8 or
documentary evidence for this exception. However, documentation may be
required for purposes of Form 1099 reporting and backup withholding.
Sales of bonds between interest dates.
Amounts paid as part of the purchase price of an obligation sold or
exchanged between interest payment dates is not subject to NRA
withholding. This does not apply if the sale or exchange is part of a
plan the principal purpose of which is to avoid tax and you have
actual knowledge or reason to know of the plan. The exemption from NRA
withholding applies even if you do not have any documentation from the
payee. However, documentation may be required for purposes of Form
1099 reporting and backup withholding.
Short-term obligations.
Interest and original issue discount paid on an obligation that was
issued at a discount and that is payable 183 days or less from the
date of its original issue (without regard to the period held by the
taxpayer) is not subject to NRA withholding. This exemption applies
even if you do not have any documentation from the payee. However,
documentation may be required for purposes of Form 1099 reporting and
backup withholding.
Income from U.S. Savings Bonds of residents of the Ryukyu
Islands or the Trust Territory of the Pacific Islands.
Interest from a Series E, Series EE, Series H, or Series HH U.S.
Savings Bond is not subject to NRA withholding if the nonresident
alien individual acquired the bond while a resident of the Ryukyu
Islands or the Trust Territory of the Pacific Islands.
Dividends
The following types of dividends paid to foreign payees are
generally subject to NRA withholding. A substitute dividend payment
made to the transferor of a security in a securities lending
transaction or a sale-repurchase transaction is treated the same as a
distribution on the transferred security.
The address rule for dividends has been eliminated for all payments
made after December 31, 2000. Therefore, you may not apply a reduced
rate of withholding on dividends paid after that date to a foreign
person unless you have a Form W-8BEN (or you have valid
documentary evidence and any additional information required) that
entitles a foreign beneficial owner to a reduced rate of withholding.
If you do not have Form W-8BEN, documentary evidence or a Form
W-9 from a payee, you should apply the applicable presumption
rules.
See Notice 2001-4 under Important Changes,
earlier.
Dividends paid by U.S. corporations -- general
(Income Code 6).
This category includes all distributions of domestic corporations
(other than dividends qualifying for direct dividend rate--Income
Code 7).
A corporation making a distribution with respect to its stock or
any intermediary making a payment of such a distribution, is required
to withhold on the entire amount of the distribution. However, a
distributing corporation or intermediary may elect to reduce the
amount withheld to the extent that the distribution:
- Represents a nontaxable distribution payable in stock or
stock rights,
- Represents a distribution in part or full payment in
exchange for stock,
- Is not paid out of current or accumulated earnings and
profits, based on a reasonable estimate of the anticipated amount of
earnings and profits for the tax year of the distribution made at a
time reasonably close to the date of the distribution.
- Represents a capital gain dividend or an exempt interest
dividend by a regulated investment company, or
- Is subject to withholding under section 1445 of the Internal
Revenue Code (withholding on dispositions of U.S. real property
interests) and the distributing corporation is a U.S. real property
holding corporation or a real estate investment trust (REIT).
The election is made by actually reducing the amount of
withholding at the time the distribution is paid.
Dividends paid by a domestic corporation (an "80/20"
company).
Generally, a percentage of any dividend paid by a domestic
corporation that received at least 80% of its gross income from the
active conduct of a foreign business for a testing period is not
subject to NRA withholding. The testing period is the 3 tax years
before the year in which the dividends are declared, or shorter period
if the corporation was not in existence for 3 years. The percentage is
found by dividing the corporation's foreign gross income for the
testing period by the corporation's total gross income for that
period.
Main business in Puerto Rico or the Virgin Islands.
Dividends paid by a domestic corporation that generally conducts
its main business activities in Puerto Rico or the Virgin Islands and
that has chosen the Puerto Rico economic activity credit or the
possession tax credit are not subject to NRA withholding.
Jointly-owned stock.
If stock is jointly owned, you may treat the total amount of the
dividend as paid to a U.S. person if any one of the owners gives you a
Form W-9. If all the owners are foreign persons, you should
withhold at the highest rate applicable. If all the owners provide
documentation that permits them to receive the same reduced rate of
withholding (for example, under an income tax treaty) you should apply
the reduced rate of withholding. You are required, however, to report
the payment on one Form 1042-S to the person whose status you
rely upon to determine the withholding rate. If, however, any one of
the owners requests its own Form 1042-S, you must furnish Form
1042-S to the person who requests it. If more than one Form
1042-S is issued for a single payment, the total amount paid and
tax withheld reported on all Forms 1042-S cannot exceed the
total amounts paid to joint owners.
Consent dividends.
If you receive a Form 972, Consent of Shareholder To Include
Specific Amount in Gross Income, from a nonresident alien
individual or other foreign shareholder who agrees to treat the amount
as a taxable dividend, you must pay and report on Form 1042 and Form
1042-S any withholding tax you would have withheld if the
dividend had been actually paid.
Dividends qualifying for direct dividend rate
(Income Code 7).
A treaty may reduce the rate of withholding on dividends from that
which generally applies under the treaty if the shareholder owns a
certain percentage of the voting stock of the corporation. Generally,
this preferential rate applies only if the shareholder directly owns
the required percentage, although some treaties permit the percentage
to be met by direct or indirect ownership. The preferential rate may
apply to the payment of a deemed dividend under section 304(a)(1) of
the Internal Revenue Code. Under some treaties, the preferential rate
for dividends qualifying for the direct dividend rate applies only if
no more than a certain percentage of the paying corporation's gross
income for a certain period consists of dividends and interest other
than dividends and interest from subsidiaries or from the active
conduct of a banking, financing, or insurance business. A foreign
person claiming the non-portfolio stock treaty rate should complete
line 10 of Form W-8BEN regarding special rates and conditions.
Consent dividends.
If you receive a Form 972 from a foreign parent corporation, which
agrees to treat the amount as a taxable dividend, you must pay and
report on Form 1042 and Form 1042-S any withholding tax you
would have withheld if the dividend had been actually paid.
Dividends paid by foreign corporations
(Income Code 8).
Dividends paid by a foreign corporation are generally subject to
NRA withholding if 25% or more of its gross income is effectively
connected (or treated as effectively connected) with a U.S. trade or
business for the 3 tax years (or shorter period) before the year in
which the dividends are paid. Taxes should be withheld in the same
ratio that the effectively connected gross income bears to the total
gross income of the foreign corporation. If less than 25% of the
corporation's gross income is effectively connected with a U.S. trade
or business, then the dividends are not subject to NRA withholding.
The payment to a foreign corporation by a foreign corporation of a
deemed dividend under section 304(a)(1) of the Internal Revenue Code
is subject to NRA withholding except to the extent it can be clearly
determined to be from foreign sources.
Corporation subject to branch profits tax.
If a foreign corporation is subject to branch profits tax for any
tax year, withholding is not required on any dividends paid by the
corporation out of its earnings and profits for that tax year.
Dividends may be subject to NRA withholding if they are attributable
to any earnings and profits when the branch profits tax is prohibited
by a tax treaty.
A foreign person may claim a treaty benefit on dividends paid by a
foreign corporation to the extent the dividends are paid out of
earnings and profits in a year in which the foreign corporation was
not subject to the branch profits tax. However, you may apply a
reduced rate of withholding under an income tax treaty only under
rules similar to the rules that apply to treaty benefits claimed on
branch interest paid by a foreign corporation. You should check the
specific treaty provision.
Certain Gains
Except as provided below, you generally do not need to do NRA
withholding on gains from the sale of real or personal property
because it is not FDAP income. However, you may be required to
withhold if you purchase a U.S. real property interest, including
stock of a U.S. real property holding company, from a foreign person.
See U.S. Real Property Interest, later.
Capital gains
(Income Code 9).
Certain gains are subject to NRA withholding. You must withhold at
30%, or if applicable, a reduced treaty rate, on the gross amount of
the following items:
- Gains on disposal of timber, coal, or domestic iron ore with
a retained economic interest, unless an election is made to treat
those gains as income effectively connected with a U.S. trade or
business,
- Gains on contingent payments received from the sale or
exchange after October 4, 1966, of patents, copyrights, secret
processes and formulas, good will, trade marks, trade brands,
franchises, and other like property,
- Gains on certain transfers of all substantial rights to, or
an undivided interest in, patents if the transfers were made before
October 5, 1966, and
- Certain gains from the sale or exchange of original issue
discount obligations issued after March 31, 1972. For more on
withholding on original issue discount obligations, see
Interest, earlier.
If you do not know the amount of the gain, you must withhold an
amount necessary to assure that the tax withheld will not be less than
30% of the recognized gain. The amount to be withheld, however, must
not be more than 30% of the amount payable because of the transaction.
Unless you have reason to believe otherwise, you may rely upon the
written statement of the person entitled to the income as to the
amount of gain. The statement, prepared according to regulations, must
show the computation of the gain.
Tax treaties.
Many tax treaties exempt certain types of gains from U.S. income
tax. The conditions for allowing the exemptions vary under each
treaty. For example, under some treaties, a nonresident alien
individual may not be present in the United States for more than a
specified period for the exemption to apply. Be sure to carefully
check the provision of the treaty that applies before allowing an
exemption from withholding.
Royalties
In general, you must withhold tax on the payment of royalties from
sources in the United States. However, certain types of royalties are
given reduced rates or exemptions under some tax treaties.
Accordingly, these different types of royalties are treated as
separate categories for withholding purposes.
Industrial royalties
(Income Code 10).
This category of income includes royalties for the use of, or the
right to use, patents, trademarks, secret processes and formulas,
goodwill, franchises, "know-how," and similar rights. It also may
include rents for the use or lease of personal property. Under certain
tax treaties, different rates may apply to royalties for information
concerning industrial, commercial, and scientific know-how.
Motion picture or television copyright royalties
(Income Code 11).
This category refers to royalties paid for the use of motion
picture and television copyrights.
Other royalties (e.g., copyright, recording, publishing)
(Income Code 12).
This category refers to the royalties paid for the use of
copyrights on books, periodicals, articles, etc., except motion
picture and television copyrights.
Real Property Income and
Natural Resources Royalties
(Income Code 13)
You must withhold tax on income (such as rents and royalties) from
real property located in the United States and held for the production
of income, unless the foreign payee elects to treat this income as
effectively connected with a U.S. trade or business. If the foreign
payee chooses to treat this income as effectively connected, the payee
must give you Form W-8ECI (discussed earlier). This real
property income includes royalties from mines, wells, or other natural
deposits, as well as ordinary rents for the use of real property. For
withholding that applies to the disposition of U.S. real property
interests, see U.S. Real Property Interest, later.
Pensions, Annuities, and Alimony
(Income Code 14)
The following rules apply to withholding on pensions, annuities,
and alimony of foreign payees.
Pensions and annuities.
Generally, you must withhold tax on the gross amount of pensions
and annuities that you pay that are from sources within the United
States. However, most tax treaties provide that private pensions and
annuities are exempt from withholding.
In the absence of a treaty exemption, you must withhold at the
statutory rate of 30% on the entire distribution that is from sources
within the United States. You may, however, apply withholding at
graduated rates to the portion of a distribution that arises from the
performance of services in the United States after December 31, 1986,
provided you receive Form W-8ECI and can determine the portion
of the distribution that constitutes income effectively connected with
the conduct of a trade or business in the United States. The
withholding rules that apply to payments to foreign persons generally
take precedence over any other withholding rules that would apply to
distributions from qualified plans and other qualified retirement
arrangements.
No withholding.
Do not withhold tax on an annuity payment to a nonresident alien if
at the time of the first payment from the plan, 90% or more of the
employees eligible for benefits under the plan are citizens or
residents of the United States and the payment is:
- For the nonresident's personal services performed outside
the United States, or
- For personal services by a nonresident individual present in
the United States for 90 days or less during each tax year, whose pay
for those services does not exceed $3,000, and the personal services
are performed for:
- A nonresident alien individual, foreign partnership, or
foreign corporation not engaged in a trade or business in the United
States, or
- An office or place of business of a U.S. resident or citizen
which is maintained outside the United States.
If the payment otherwise qualifies under these rules, but less than
90% of the employees eligible for benefits are citizens or residents
of the United States, you still need not withhold tax on the payment
if:
- The recipient is a resident of a country that gives a
substantially equal exclusion to U.S. citizens and residents,
or
- The recipient is a resident of a beneficiary developing
country under the Trade Act of 1974.
The foreign person entitled to the payments must provide you with a
Form W-8BEN that contains the TIN of the foreign person.
Alimony payments.
Generally, alimony payments made by U.S. residents to nonresident
aliens are taxable and subject to NRA withholding whether the
recipients are residing abroad or are temporarily present in the
United States.
Many tax treaties, however, provide for an exemption from
withholding for alimony payments. These treaties are shown in
Table 1, by a footnote reference under Income code
number 14.
Alimony payments made to a nonresident alien by a U.S. ancillary
administrator of a nonresident alien estate are from foreign sources
and are not subject to withholding.
Scholarships and
Fellowship Grants
A scholarship or fellowship grant (Income Code 15) is an
amount given to an individual to perform study, training, or research,
and which does not constitute compensation for personal services.
Whether a fellowship grant from U.S. sources is subject to NRA
withholding depends on the nature of the payments and whether the
recipient is a candidate for a degree.
Candidate for a degree.
Do not withhold on a qualified scholarship from U.S. sources
granted and paid to a candidate for a degree. A qualified
scholarship means any amount paid to an individual as a
scholarship or fellowship grant to the extent that, in accordance with
the conditions of the grant, the amount is to be used for the
following expenses:
- Tuition and fees required for enrollment or attendance at an
educational organization, and
- Fees, books, supplies, and equipment required for courses of
instruction at the educational organization.
The payment of a qualified scholarship to a nonresident alien is
not reportable and is not subject to NRA withholding. However, the
portion of a scholarship or fellowship paid to a nonresident alien
which does not constitute a qualified scholarship is reportable on
Form 1042-S and is subject to NRA withholding. For example,
those portions of a scholarship devoted to travel, room, and board are
subject to NRA withholding and are reported on Form 1042-S. The
withholding rate is 14% on taxable scholarship and fellowship grants
paid to nonresident aliens temporarily present in the United States in
"F,""J,""M," or "Q" nonimmigrant status. Payments
made to nonresident alien individuals in any other immigration status
are subject to 30% withholding.
Nondegree candidate.
If the person receiving the scholarship or fellowship grant is not
a candidate for a degree, and is present in the United States in
"F,""J,""M," or "Q" nonimmigrant status, you must
withhold tax at 14% on the total amount of the grant that is from U.S.
sources if the following requirements are met:
- The grant must be for study, training, or research at an
educational organization in the United States, and
- The grant must be made by:
- A tax-exempt organization operated for charitable,
religious, educational, etc. purposes,
- A foreign government,
- A federal, state, or local government agency, or
- An international organization, or a binational or
multinational educational or cultural organization created or
continued by the Mutual Educational and Cultural Exchange Act of 1961
(known as the Fulbright-Hays Act).
If the grant does not meet both (1) and (2) above, you must
withhold at 30% on the amount of the grant that is from U.S. sources.
Reduced withholding.
Nonresident alien students or grantees who receive U.S. source
grants or scholarships may be entitled to reduced withholding on the
taxable part of the grant or scholarship under an alternate
withholding procedure. The students or grantees must have been
admitted into the United States on an "F,""J,""M," or
"Q" visa. This alternate withholding procedure is not mandatory,
and does not have to be used by you.
Under this alternate withholding procedure, the student or grantee
gives you a specially prepared Form W-4. The student or grantee
must complete Form W-4 annually following the instructions given
here and forward it to you, the payer of the scholarship, or your
designated withholding agent. You may rely on the information on Form
W-4 unless you know or have reason to know it is incorrect. You
must file a Form 1042-S (discussed later) for each student or
grantee who gives you, or your withholding agent, a Form W-4.
Each student or grantee who files a Form W-4 must file an
annual U.S. income tax return to be allowed the exemptions and
deductions claimed on that form. If the individual is in the United
States during more than one tax year, he or she must attach a
statement to the annual Form W-4 indicating that the individual
has filed a U.S. income tax return for the previous year. If he or she
has not been in the United States long enough to have to file a
return, the individual must attach a statement to the Form W-4
saying that a timely U.S. income tax return will be filed.
A prorated portion of allowable personal exemptions based on the
projected number of days he or she will be in this country is allowed.
This is figured by multiplying the daily exemption amount ($7.95 for
2001) by the number of days the student or grantee expects to be in
the United States during the year. The prorated exemption amount
should be shown on line A of the Personal Allowances Worksheet
that comes with Form W-4.
On line B, a student or grantee who qualifies under Article 21(2)
of the United States--India Income Tax Treaty can enter the
standard deduction if he or she does not claim away-from-home expenses
or other itemized deductions (discussed later). All other nonresident
aliens must enter "0."
Generally, zero (-0-) should be shown on lines C and D of the
worksheet. But, an additional daily exemption amount may be allowed
for the spouse and each dependent if the student or grantee is:
- A resident of Canada, Mexico, Japan, or South Korea,
- A U.S. national (a citizen of American Samoa, or a Northern
Mariana Islander who chose to become a U.S. national), or
- Eligible for the benefits of Article 21(2) of the United
States--India Income Tax Treaty.
These additional amounts should be entered on lines C and D, as
appropriate.
As lines E, F, and G of the worksheet do not apply to nonresident
aliens subject to this procedure, there should be no entries on those
lines.
The nonresident alien student or grantee may deduct away-from-home
expenses (meals, lodging, and transportation) on Form W-4 if he
or she expects to be away from his or her tax home for 1 year or less.
The amount of the claimed expenses should be the anticipated actual
amount, if known. If the amount of the expenses is not known at the
time the W-4 is filed with you, the current per diem allowance
in effect for participants in the Career Education Program under the
Federal Travel Regulations may be claimed on Form W-4. The
allowable amount is $18.00 per day.
The actual expenses or the per diem allowance should be shown on
line A of the worksheet in addition to the personal exemption amount.
The student or grantee can claim other expenses that will be
deductible on Form 1040NR. These include student loan interest,
certain state and local income taxes, charitable contributions,
casualty losses, and moving expenses. He or she should include these
anticipated amounts on line A of the worksheet.
The student or grantee can also enter on line A of the worksheet,
the part of the grant or scholarship that is tax exempt under the
statute or a tax treaty.
Lines A through D of the Personal Allowances Worksheet
are added and the total should be shown on line H.
The payer of the grant or scholarship must review the Form
W-4 to make sure all the necessary and required information is
provided. If the withholding agent knows or has reason to know that
the amounts shown on the Form W-4 may be false, the withholding
agent must reject the Form W-4 and withhold at the appropriate
statutory rate (14% or 30%). However, if the only incorrect
information is that the student or grantee's stay in the United States
has extended beyond 12 months, the withholding agent may withhold
under these rules, but without a deduction for away-from-home
expenses.
After receipt and acceptance of the Form W-4, the payer must
withhold at the graduated rates in Publication 15 (Circular E) as if
the grant or scholarship income were wages. The gross amount of the
income is reduced by the total amount of exemptions and deductions on
the Form W-4 and the withholding tax is figured on the rest.
When completing Form 1042-S for the student or grantee, enter
the gross scholarship or fellowship grant in box 2, enter the
withholding allowance amount from line H of the Personal
Allowances Worksheet of Form W-4 in box 3, and show the
net of these two amounts in box 4.
Pay for services rendered.
Pay for services rendered as an employee by an alien who also is
the recipient of a scholarship or fellowship grant usually is subject
to graduated withholding according to the rules discussed later in
Wages Paid to Employees--Graduated Withholding. This
includes taxable amounts an individual who is a candidate for a degree
receives for teaching, doing research, and carrying out other
part-time employment required as a condition for receiving the
scholarship or fellowship grant.
Grants given to students, trainees, or researchers which require
the performance of personal services as a necessary condition for
disbursing the grant do not qualify as scholarship or fellowship
grants. Instead, they are compensation for personal services
considered to be wages. It does not matter what term is used to
describe the grant (for example, stipend, scholarship, fellowship,
etc.).
Withholding agents who pay grants that are in fact wages must
report such grants on Forms 941 and W-2 and withhold income tax
on them at the graduated rates. Withholding agents may not allow tax
treaty exemptions which apply to scholarships and fellowships to be
applied to grants which are really wages. It is the responsibility of
the withholding agent to determine whether a grant is "wages" or
a "scholarship or fellowship," and to report and withhold on the
grant accordingly. An alien student, trainee, or researcher may not
claim a scholarship or fellowship treaty exemption against income
which has been reported to him on Form W-2 as wages.
Amounts of per diem for subsistence paid by the U.S.
Government.
Amounts of per diem for subsistence paid by the U.S. Government
(directly or by contract) to a nonresident alien engaged in a training
program in the United States under the Mutual Security Act of 1954
(grants funded by the U.S. Agency for International Development) are
not subject to 14% or 30% withholding. This is true even though the
alien may be subject to income tax on those amounts.
Tax treaties.
The student articles of many of the income tax treaties contain
exemptions from U.S. taxation for scholarships and fellowships.
Although usually found in the student articles of the tax treaties,
many of these exemptions also apply to research grants received by
researchers who are not students. Table 2 of this
publication shows a line entry entitled "Scholarship or fellowship
grant" for those treaties which have such an exemption. The treaty
provision usually exempts the entire scholarship or fellowship amount,
regardless of whether the grant is a "qualified scholarship"
under U.S. law.
An alien student, trainee, or researcher may claim a treaty
exemption for a scholarship or fellowship by submitting Form
W-8BEN to the payer of the grant. However, a scholarship or
fellowship recipient who receives both wages and a scholarship or
fellowship from the same institution, and who wishes to claim treaty
exemptions on both kinds of income, may utilize Form 8233 for claiming
both treaty exemptions.
For payments made on or after January 1, 2001, the scholarship or
fellowship recipient who is claiming a treaty exemption must provide
you with his or her TIN on Form W-8BEN or on Form 8233 or you
cannot allow the treaty exemption. A Form W-7, showing that a
TIN has been applied for, can be filed with a Form 8233.
Nonresident alien who becomes a resident alien.
Generally, only a nonresident alien individual may use the terms of
a tax treaty to reduce or eliminate U.S. tax on income from a
scholarship or fellowship grant. A student (including a trainee or
business apprentice) or researcher who has become a resident alien for
U.S. tax purposes may be able to claim benefits under a tax treaty
that apply to reduce or eliminate U.S. tax on scholarship or
fellowship grant income. Most treaties contain a provision known as a
"saving clause." Exceptions specified in the saving clause may
permit an exemption from tax to continue for scholarship or fellowship
grant income even after the recipient has otherwise become a U.S.
resident alien for tax purposes. In this situation, the individual
must give you a Form W-9 and an attachment that includes all the
following information.
- The individual's name.
- The individual's U.S. identification number.
- A statement that the individual is a resident alien under:
- The green card test,
- The substantial presence test, or
- The residency article of a tax treaty.
- The tax treaty under which the individual is claiming a
benefit.
- The article number of the tax treaty under which the
individual is claiming a benefit, and a description of the
article.
- A statement that the individual is relying upon an exception
to the saving clause of the tax treaty to claim the benefit.
Example.
Article 20 of the U.S.--China income tax treaty allows an
exemption from tax for scholarship income received by a Chinese
student temporarily present in the United States. Under the Internal
Revenue Code, a student may become a resident alien for tax purposes
if his or her stay in the United States exceeds 5 calendar years.
However, the treaty allows the provisions of Article 20 to continue to
apply even after the Chinese student becomes a resident alien of the
United States.
Other Grants, Prizes, and Awards
Other grants, prizes, and awards made by grantors which reside in
the United States are treated as income from sources within the United
States. Those made for activities conducted outside the United States
or by grantors which reside outside the United States are treated as
income from foreign sources. These provisions do not apply to salaries
or other pay for services.
Grant.
The purpose of a grant must be to achieve a specific objective,
produce a report or other similar product, or improve or enhance a
literary, artistic, musical, scientific, teaching, or other similar
capacity, skill, or talent of the grantee. A grant must also be an
amount which does not qualify as a scholarship or fellowship. The
grantor must not intend the amount to be given to the grantee for the
purpose of aiding the grantee to perform study, training, or research.
Prizes and awards.
Prizes and awards are amounts received primarily in recognition of
religious, charitable, scientific, educational, artistic, literary, or
civic achievement, or are received as the result of entering a
contest. A prize or award is taxable to the recipient unless all of
the following conditions are met:
- The recipient was selected without any action on his or her
part to enter the contest or proceeding,
- The recipient is not required to render substantial future
services as a condition to receive the prize or award, and
- The prize or award is transferred by the payer to a
governmental unit or tax-exempt charitable organization as designated
by the recipient.
Targeted grants and achievement awards.
Targeted grants and achievement awards received by nonresident
aliens for activities conducted outside the United States are treated
as income from foreign sources. Targeted grants and achievement awards
are issued by exempt organizations or by the United States (or one of
its instruments or agencies), a state (or a political subdivision of a
state), or the District of Columbia for an activity (or past activity
in the case of an achievement award) undertaken in the public
interest.
Pay for Personal Services Performed
This section explains the rules for withholding tax from pay for
personal services. You generally must withhold tax at the 30% rate on
compensation you pay to a nonresident alien individual for labor or
personal services performed in the United States, unless that pay is
specifically exempted from withholding or subject to graduated
withholding. This rule applies regardless of your place of residence,
the place where the contract for service was made, or the place of
payment.
Illegal aliens.
Foreign agricultural workers or other foreign workers who are
illegal aliens are subject to U.S. taxes in spite of their illegal
status. U.S. employers or payers who hire illegal aliens may be
subject to various fines, penalties, and sanctions imposed by the
Immigration and Naturalization Service (INS). If such employers or
payers choose to hire illegal aliens, the payments made to those
aliens are subject to the same tax withholding and reporting
obligations that apply to other classes of aliens. Illegal aliens who
are nonresident aliens and who receive income from performing
independent personal services are subject to 30% withholding unless
exempt under some provision of law or a tax treaty. Illegal aliens who
are resident aliens and who receive income from performing dependent
personal services are subject to the same reporting and withholding
obligations which apply to U.S. citizens who receive the same kind of
income.
Form 8233,
Exemption From Withholding on Compensation for Independent
(and Certain Dependent) Personal Services of a Nonresident Alien
Individual, is used by a nonresident alien individual to claim
exemption from withholding on some or all compensation paid for:
- Independent personal services (self-employment), or
- Dependent personal services provided by a student,
professor/teacher, researcher, or business/vocational trainee.
Persons providing independent personal services should use Form
8233 to claim a tax treaty exemption and/or the personal exemption
amount. Persons providing dependent personal services should use Form
8233 to claim a tax treaty exemption for any part of their
compensation that is exempt from withholding. A student or teacher
receiving scholarship income and compensation for personal services
from the same withholding agent may use the form to claim treaty
benefits on the scholarship income.
Form W-4,
Employee's Withholding Allowance Certificate, is used
by a person providing dependent personal services to claim the
personal exemption amount. Nonresident alien individuals are subject
to special instructions for completing the Form W-4. See the
discussion under Wages Paid to Employees--Graduated
Withholding, later.
Pay for independent personal services
(Income Code 16).
Independent personal services (a term commonly used in tax
treaties) are personal services performed by an independent
nonresident alien contractor as contrasted with those performed by an
employee. This category of pay includes payments for professional
services, such as fees of an attorney, physician, or accountant made
directly to the person performing the services. It also includes
honoraria paid by colleges and universities to visiting teachers,
lecturers, and researchers.
Pay for independent personal services is subject to NRA withholding
and reporting as follows.
30% rate.
You must withhold at the statutory rate of 30% on all payments
unless the alien enters into a withholding agreement or receives a
final payment exemption (discussed later).
The amount of pay subject to 30% withholding may be reduced by the
personal exemption amount ($2,900 for 2001) if the alien gives you a
properly completed Form 8233. A nonresident alien is allowed only one
personal exemption. However, individuals who are residents of Canada,
Mexico, Japan, or South Korea, or are U.S. nationals (defined below)
are generally entitled to the same exemptions as U.S. citizens.
Students and business apprentices covered by Article 21(2) of the
United States--India Income Tax Treaty may claim an additional
exemption for their spouse if a joint return is not filed, and if the
spouse has no gross income for the year and is not the dependent of
another taxpayer. They may also claim additional exemptions for
children who reside with them in the United States at any time during
the year, but only if the dependents are U.S. citizens or nationals or
residents of the United States, Canada, or Mexico. They may not claim
exemptions for dependents who are admitted to the United States on
"F-2," "J-2," or "M-2" visas unless
such dependents have become resident aliens.
Each allowable exemption must be prorated according to the number
of days during the tax year during which the alien performs services
in the United States. Multiply the number of these days by $7.95 (the
daily exemption amount for 2001) to figure the prorated amount.
Residents of Japan and South Korea must make a further proration of
their additional exemptions based on their gross income effectively
connected with a U.S. trade or business. The rules for this proration
are discussed in detail in Publication 519.
A U.S. national is an individual who owes his sole
allegiance to the United States, but who is not a U.S. citizen. Such
an individual is usually a citizen of American Samoa, or a Northern
Mariana Islander who chose to become a U.S. national.
Example 1.
Hans Schmidt, who is a resident of Germany, worked (not as an
employee) for a U.S. company in the United States for 100 days during
2001 before returning to his country. He earned $6,000 for the
services performed (not considered wages) in the United States. Hans
is married and has three dependent children. His wife did not work and
had no income subject to U.S. tax. Hans is allowed $795 as a deduction
against the payments for his personal services performed in the United
States (100 days x $7.95). Tax must be withheld at 30% on the
rest of his earnings, $5,205 ($6,000 - $795). A tax of $1,561.50
must be withheld from Hans' earnings (30% of $5,205).
Example 2.
If, in Example 1, Hans were a resident of Canada or
Mexico or a national of the United States, working under contract with
a domestic corporation, $3,975 (100 days x $7.95 per day for
each of five exemptions) would be allowed against the payments for
personal services performed in the United States. Tax must be withheld
at 30% on $2,025 ($6,000 - $3,975), the rest of his earnings. A
tax of $607.50 must be withheld from Hans' earnings (30% of $2,025).
Withholding agreements.
Pay for personal services of a nonresident alien who is engaged
during the tax year in the conduct of a U.S. trade or business may be
wholly or partially exempted from withholding at the statutory rate if
an agreement has been reached between the Commissioner or his delegate
and the alien individual as to the amount of withholding required.
This agreement will be effective for payments covered by the agreement
that are made after the agreement is executed by all parties. The
alien individual must agree to timely file an income tax return for
the current tax year.
Final payment exemption.
The final payment of compensation for independent personal services
may be wholly or partially exempt from withholding at the statutory
rate. This exemption does not apply to wages paid to an employee. The
nonresident alien must have been engaged during the tax year in the
conduct of a U.S. trade or business. This exemption is available only
once during an alien individual's tax year. It applies to the last
payment of compensation, other than wages, for personal services
rendered in the United States that the individual expects to receive
from any withholding agent during the tax year.
To obtain the final payment exemption, the nonresident alien, or
the alien's agent, must file the forms and provide the information
required by the Commissioner or his delegate. This information
includes, but is not limited to, the following items.
- A statement by each withholding agent from whom amounts of
gross income effectively connected with the conduct of a U.S. trade or
business have been received by the alien individual during the tax
year. It must show the amount of income paid and the amount of tax
withheld. The withholding agent must sign each statement and include a
declaration that it is made under penalties of perjury.
- A statement by the withholding agent from whom the final
payment of compensation for personal services will be received showing
the amount of final payment and the amount that would be withheld if a
final payment exemption is not granted. The withholding agent must
sign the statement and include a declaration that it is made under
penalties of perjury.
- A statement by the individual that he or she does not intend
to receive any other amounts of gross income effectively connected
with the conduct of a U.S. trade or business during the current tax
year.
- The amount of tax that has been withheld (or paid) under any
other provision of the Code or regulations for any income effectively
connected with the conduct of a U.S. trade or business during the
current tax year.
- The amount of any outstanding tax liabilities, including any
interest and penalties, from the current tax year or prior tax
periods.
- The provision of any income tax treaty under which a partial
or complete exemption from withholding may be claimed, the country of
the individual's residence, and a statement of sufficient facts to
justify an exemption under that treaty.
The alien individual must give a statement, signed and verified
by a declaration that it is made under the penalties of perjury, that
all the information provided is true, and that to his or her knowledge
no relevant information has been omitted.
If satisfied with the information provided, the Commissioner or his
delegate will determine the amount of the alien individual's tentative
income tax for the tax year on gross income effectively connected with
the conduct of a U.S. trade or business. Ordinary and necessary
business expenses may be taken into account if proved to the
satisfaction of the Commissioner or his delegate.
The Commissioner or his delegate will provide the individual with a
letter to you, the withholding agent, stating the amount of the final
payment of compensation for personal services that is exempt from
withholding, and the amount that would otherwise be withheld that may
be paid to the individual due to the exemption. The amount of pay
exempt from withholding cannot be more than $5,000. The alien
individual must give two copies of the letter to you and must also
attach a copy of the letter to his or her income tax return for the
tax year for which the exemption is effective.
Travel expenses.
If you pay or reimburse the travel expenses of a nonresident alien,
the payments are not reportable to the IRS and are not subject to NRA
withholding if the payments are made under an accountable plan as
described in section 1.62-2 of the regulations. This treatment
applies only to that portion of a payment that represents the payment
of travel and lodging expenses and not to that portion that represents
compensation for his independent personal services.
Tax treaties.
Under most tax treaties, pay for independent personal services
performed in the United States is exempt from U.S. income tax only if
the independent nonresident alien contractor performs the services
during a period of temporary presence in the United States (usually
not more than 183 days) and is a resident of the treaty country. Thus,
the pay is not exempt from U.S. tax if the contractor is a U.S.
resident.
Independent nonresident alien contractors use Form 8233 to claim an
exemption from withholding under a tax treaty. For more information,
see Form 8233, earlier.
Often, you must withhold under the statutory rules on payments made
to a treaty country resident contractor for services performed in the
United States. This is because the factors on which the treaty
exemption is based may not be determinable until after the close of
the tax year. The treaty country resident contractor must then file a
U.S. income tax return (Form 1040NR or Form 1040NR-EZ) to
recover any overwithheld tax and to provide the IRS with proof that he
or she is entitled to a treaty exemption.
Wages Paid to Employees--
Graduated Withholding
Salaries, wages, or any other pay for personal services (referred
to collectively as wages) paid to nonresident alien employees are
subject to graduated withholding in the same way as for U.S. citizens
and residents if the wages are effectively connected with the conduct
of a U.S. trade or business. Any wages paid to a nonresident alien
individual for personal services performed as an employee for an
employer are generally exempt from the 30% withholding if the
wages are subject to graduated withholding.
Also exempt from the 30% withholding is pay for personal services
performed as an employee for an employer if it is effectively
connected with the conduct of a U.S. trade or business and is
specifically excepted from wages. See Pay that is not wages,
later.
Employer-employee relationship.
For pay for personal services to qualify as wages, there must be an
employer-employee relationship.
Under the common law rules, every individual who performs services
subject to the will and control of an employer, both as to what shall
be done and how it shall be done, is an employee. It does not matter
that the employer allows the employee considerable discretion and
freedom of action, as long as the employer has the legal right to
control both the method and the result of the services.
If an employer-employee relationship exists, it does not matter
what the parties call the relationship. It does not matter if the
employee is called a partner, coadventurer, agent, or independent
contractor. It does not matter how the pay is measured, how the
individual is paid, or what the payments are called. Nor does it
matter whether the individual works full- or part-time.
The existence of the employer-employee relationship under the usual
common law rules will be determined, in doubtful cases, by an
examination of the facts of each case.
Employee.
An employee generally includes any individual who performs services
if the relationship between the individual and the person for whom the
services are performed is the legal relationship of employer and
employee. This includes an individual who receives a supplemental
unemployment pay benefit that is treated as wages.
No distinction is made between classes of employees.
Superintendents, managers, and other supervisory personnel are
employees. Generally, an officer of a corporation is an employee, but
a director acting in this capacity is not. An officer who does not
perform any services, or only minor services, and neither receives nor
is entitled to receive any pay is not considered an employee.
Employer.
An employer is any person or organization for whom an individual
performs or has performed any service, of whatever nature, as an
employee. The term "employer" includes not only individuals and
organizations in a trade or business, but organizations exempt from
income tax, such as religious and charitable organizations,
educational institutions, clubs, social organizations, and societies.
It also includes the governments of the United States, the states,
Puerto Rico, and the District of Columbia, as well as their agencies,
instrumentalities, and political subdivisions.
Two special definitions of employer that may have considerable
application to nonresident aliens are:
- An employer includes any person paying wages for a
nonresident alien individual, foreign partnership, or foreign
corporation not engaged in trade or business in the United States
(including Puerto Rico as if a part of the United States), and
- An employer includes any person who has control of the
payment of wages for services that are performed for another person
who does not have that control.
For example, if a trust pays wages, such as certain types of
pensions, supplemental unemployment pay, or retired pay, and the
person for whom the services were performed has no legal control over
the payment of the wages, the trust is the employer.
These special definitions have no effect upon the relationship
between an alien employee and the actual employer when determining
whether the pay received is considered to be wages.
If an employer-employee relationship exists, the employer
ordinarily must withhold the income tax from wage payments by using
the percentage method or wage-bracket tables as shown in Publication 15, (Circular E).
Pay that is not wages.
Employment for which the pay is not considered wages (for graduated
income tax withholding) includes, but is not limited to, the following
items.
- Agricultural labor if the total cash wages paid to an
individual worker during the year is less than $150 and the total paid
to all workers during the year is less than $2,500. But even if the
total amount paid to all workers is $2,500 or more, wages of less than
$150 per year paid to a worker are not subject to income tax
withholding if certain conditions are met. For these conditions, see
Publication 51
(Circular A), Agricultural Employer's Tax Guide.
- Services of a household nature performed in or about the
private home of an employer, or in or about the clubrooms or house of
a local college club, fraternity, or sorority. A local college club,
fraternity, or sorority does not include an alumni club or chapter and
may not be operated primarily as a business enterprise. Examples of
these services include those performed as a cook, janitor,
housekeeper, governess, gardener, or houseparent.
- Certain services performed outside the course of
the employer's trade or business for which cash payment is less than
$50 for the calendar quarter.
- Services performed as an employee of a foreign government,
without regard to citizenship, residence, or where services are
performed. These include services performed by ambassadors, other
diplomatic and consular officers and employees, and nondiplomatic
representatives. They do not include services for a U.S. or Puerto
Rican corporation owned by a foreign government.
- Services performed within or outside the United States by an
employee or officer (regardless of citizenship or residence) of an
international organization designated under the International
Organizations Immunities Act.
- Services performed by a duly ordained, commissioned, or
licensed minister of a church, but only if performed in the exercise
of the ministry and not as an employee of the United States, a U.S.
possession, or a foreign government, or any of their political
subdivisions. These also include services performed by a member of a
religious order in carrying out duties required by that order.
- Tips paid to an employee if they are paid in any medium
other than cash or, if in cash, they amount to less than $20 in any
calendar month in the course of employment.
Services performed outside the United States.
Compensation paid to a nonresident alien (other than a resident of
Puerto Rico, discussed later) for services performed outside the
United States is not considered wages and is not subject to graduated
withholding or 30% withholding.
See Notice 2001-4 under Important Changes,
earlier.
Withholding exemptions.
The amount of wages subject to graduated withholding may be reduced
by the personal exemption amount ($2,900 for 2001). The personal
exemptions allowed in figuring wages subject to graduated withholding
are the same as those discussed earlier under Pay for independent
personal services, except that an employee must claim them on
Form W-4.
Special instructions for Form W-4.
A nonresident alien subject to wage withholding must give the
employer a completed Form W-4 to enable the employer to figure
how much income tax to withhold. In completing the form, nonresident
aliens should use the following instructions instead of the
instructions on Form W-4.
- Check only "Single" marital status on line 3
(regardless of actual marital status).
- Claim only one withholding allowance on line 5, unless a
resident of Canada, Mexico, Japan, or South Korea, or a U.S.
national.
- Request that additional tax of $7.60 per week be withheld on
line 6. If the pay period is two weeks, request that $15.30 be
withheld instead. For other payroll periods, see the amounts in
Publication 15 (Circular E).
- Do not claim "Exempt" withholding status on line
7.
These instructions restrict a nonresident alien's filing
status, generally limit the number of allowable exemptions, and
require additional tax to be withheld because a nonresident alien
cannot claim the standard deduction.
Students and business apprentices from India.
Students and business apprentices who are eligible for the benefits
of Article 21(2) of the United States--India Income Tax Treaty
can claim additional withholding allowances on line 5 for the standard
deduction and their spouses. In addition, they can claim an additional
withholding allowance for each dependent who has become a resident
alien. Furthermore, they do not have to request additional withholding
on line 6 of Form W-4.
Reporting requirements for wages and withheld taxes paid to
nonresident aliens.
The employer must report the amount of wages and deposits of
withheld income and social security and Medicare taxes by filing Form
941. Household employers should see Publication 926,
Household
Employer's Tax Guide, for information on reporting and paying
employment taxes on wages paid to household employees.
Form W-2.
The employer must also report on Form W-2 the wages subject
to NRA withholding and the withheld taxes. You must give copies of
this form to the employee. Wages exempt from tax under a tax treaty
are reported on Form 1042-S and not in block 1 of Form
W-2. Wages exempt under a tax treaty may still be reported in
the state and local wages blocks of Form W-2 if such wages are
subject to state and local taxation. For more information, see the
instructions for these forms.
Trust fund recovery penalty.
If you are a person responsible for withholding, accounting for, or
depositing or paying employment taxes, and willfully fail to do so,
you can be held liable for a penalty equal to the full amount of the
unpaid trust fund tax, plus interest. A responsible person for this
purpose can be an officer of a corporation, a partner, a sole
proprietor, or an employee of any form of business. A trustee or agent
with authority over the funds of the business can also be held
responsible for the penalty.
"Willfully" in this case means voluntarily, consciously, and
intentionally. You are acting willfully if you pay other expenses of
the business instead of the withholding taxes.
Federal unemployment tax (FUTA).
The employer must pay FUTA and file Form 940 or 940-EZ,
Employer's Annual Federal Unemployment (FUTA) Tax Return.
Only the employer pays this tax; it is not deducted from the
employee's wages. In certain cases, wages paid to students and
railroad and agricultural workers are exempt from FUTA tax. For more
information, see the instructions for these forms.
Wages paid to nonresident alien students, teachers, researchers,
trainees, and other nonresident aliens in "F-1,"
"J-1," "M-1," or "Q" nonimmigrant status
are not subject to FUTA tax.
Pay for dependent personal services
(Income Code 17).
Dependent personal services are personal services performed in the
United States by a nonresident alien individual as an employee rather
than as an independent contractor.
Pay for dependent personal services is subject to NRA withholding
and reporting as follows.
Graduated rates.
Ordinarily, you must withhold on pay (wages) for dependent personal
services using graduated rates. The nonresident alien must complete
Form W-4 as discussed earlier under Special instructions
for Form W-4, and you must report wages and income tax
withheld on Form W-2. However, the nonresident alien may be
exempt from tax or withholding of tax if any of the following four
exceptions applies.
Exception 1.
Compensation paid for labor or personal services performed in the
United States is deemed not to be income from sources within the
United States and is exempt from U.S. income tax if:
- The labor or services are performed by a nonresident alien
temporarily present in the United States for a period or periods not
exceeding a total of 90 days during the tax year,
- The total pay does not exceed $3,000, and
- The pay is for labor or services performed as an employee
of, or under a contract with:
- A nonresident alien individual, foreign partnership, or
foreign corporation that is not engaged in a trade or business in the
United States, or
- A U.S. citizen or resident alien individual, a domestic
partnership, or a domestic corporation, if the labor or services are
performed for an office or place of business maintained in a foreign
country or in a possession of the United States by this individual,
partnership, or corporation.
If the total pay is more than $3,000, the entire amount is income
from sources in the United States and is subject to U.S. tax.
Also, compensation paid for labor or services performed in the
United States by a nonresident alien in connection with the
individual's temporary presence in the United States as a regular
member of the crew of a foreign vessel engaged in transportation
between the United States and a foreign country or a U.S. possession
is not income from sources within the United States. However, this
income will be treated as U.S. source income for purposes of the rules
relating to pension, profit-sharing, and stock bonus plans, including
the minimum participation rules. Amounts includible in the employee's
income for the cost of group-term life insurance coverage provided by
the employer and amounts received under an employer's accident and
health plan will also be treated as U.S. source income.
Exception 2.
Compensation paid by a foreign employer to a nonresident alien for
the period the alien is temporarily present in the United States on an
"F,""J," or "Q" visa is exempt from U.S. income tax.
For this purpose, a foreign employer means:
- A nonresident alien individual, foreign partnership, or
foreign corporation, or
- An office or place of business maintained in a foreign
country or in a U.S. possession by a domestic corporation, a domestic
partnership, or an individual U.S. citizen or resident.
You can exempt the payment from withholding if you can reliably
associate the payment with a Form W-8BEN containing the taxpayer
identification number of the payee.
Exception 3.
Compensation paid to certain residents of Canada or Mexico who
enter or leave the United States at frequent intervals is not subject
to graduated income tax withholding or 30% withholding. These aliens
must either:
- Perform duties in transportation services (such as a
railroad, bus, truck, ferry, steamboat, aircraft, or other type)
between the United States and Canada or Mexico, or
- Perform duties connected with an international project,
relating to the construction, maintenance, or operation of a waterway,
viaduct, dam, or bridge crossed by, or crossing, the boundary between
the United States and Canada or the boundary between the United States
and Mexico.
To qualify for the exemption from withholding during a tax year, a
Canadian or Mexican resident must give the employer a statement with
name, address, and identification number, and certifying that the
resident:
- Is not a U.S. citizen or resident,
- Is a resident of Canada or Mexico, whichever applies,
and
- Expects to perform the described duties during the tax year
in question.
The statement can be in any form, but it must be dated and signed
by the employee, and must include a written declaration that it is
made under penalties of perjury.
Canadian and Mexican residents employed entirely within the
United States.
Neither the transportation service exception nor the international
projects exception applies to the pay of a resident of Canada or
Mexico who is employed entirely within the United States and who
commutes from a home in Canada or Mexico to work in the United States.
If an individual works at a fixed point or points in the United States
(such as a factory, store, office, or designated area or areas), the
wages for services performed as an employee for an employer are
subject to graduated withholding.
Exception 4.
Compensation paid for services performed in Puerto Rico by a
nonresident alien who is a resident of Puerto Rico for an employer
(other than the United States or one of its agencies) is not subject
to NRA withholding of U.S. federal income tax.
Compensation paid for either of the following types of services is
not subject to wage withholding if the alien does not expect to be a
resident of Puerto Rico during the entire tax year.
- Services performed outside the United States but not in
Puerto Rico by a nonresident alien who is a resident of Puerto Rico
for an employer other than the United States or one of its agencies,
or
- Services performed outside the United States by a
nonresident alien who is a resident of Puerto Rico, as an employee of
the United States or any of its agencies.
To qualify for the exemption from withholding for any tax year, the
employee must give the employer a statement showing the employee's
name and address and certifying that the employee:
- Is not a citizen or resident of the United States,
and
- Is a resident of Puerto Rico who does not expect to be a
resident for that entire tax year.
The statement must be signed and dated by the employee and
contain a written declaration that it is made under penalties of
perjury.
Tax treaties.
Pay for dependent personal services under some tax treaties is
exempt from U.S. income tax only if both the employer and the employee
are treaty country residents and the nonresident alien employee
performs the services while temporarily living in the United States
(usually for not more than 183 days). Other treaties provide for
exemption from U.S. tax on pay for dependent personal services if the
employer is any foreign resident and the employee is a treaty country
resident, and the nonresident alien employee performs the services
while temporarily in the United States.
Pay for teaching
(Income Code 18).
This category is given a separate income code number because most
tax treaties provide at least partial exemption from withholding and
from U.S. tax. Pay for teaching means payments to a nonresident alien
professor, teacher, or researcher by a U.S. university or other
accredited educational institution for teaching or research work at
the institution.
Graduated rates.
Graduated withholding of income tax usually applies to all wages,
salaries, and other pay for teaching and research paid by a U.S.
educational institution during the period the nonresident alien is
teaching or performing research at the institution.
A nonresident alien temporarily in the United States as a
nonimmigrant on an "F-1,""J-1,""M-1,"
or "Q-1" visa is not subject to social security and
Medicare taxes on pay for services performed to carry out the purpose
for which the alien was admitted to the United States. Social security
and Medicare taxes should not be withheld or paid on this amount.
However, if an alien is considered a resident alien, as discussed
earlier, that pay is subject to social security and Medicare taxes
even though the alien is still in one of the nonimmigrant statuses
mentioned above. This rule also applies to FUTA (unemployment) taxes
paid by the employer. Alien teachers, researchers, and other alien
employees temporarily present in the United States in "H-1a,"
"H-1b," "L-1," "O-1," "O-2,"
"P-1," "P-2," "P-3," "TC,"
"TN," refugee, or asylee immigration status are fully liable for
social security and Medicare taxes unless an exemption applies from
one of the Totalization Agreements in force between the United States
and several other nations.
The Social Security Administration publishes the complete texts and
explanatory pamphlets of the Totalization Agreements which are
available by calling 1-800-772-1213 or by
visiting the Social Security Administration web site at:
www.ssa.gov/international/inter_intro.html.
Tax treaties.
Under most tax treaties, pay for teaching or research is exempt
from U.S. income tax and from withholding for a specified period of
time when paid to a professor, teacher, or researcher, who was a
resident of the treaty country immediately prior to his entry into the
United States and who is not a citizen of the United States (see
Table 2). The U.S. educational institution paying the
compensation must report the amount of compensation paid each year
which is exempt from tax under a tax treaty on Form 1042-S. The
employer should also report the compensation in the state and local
wages blocks of Form W-2 if the wages are subject to state and
local taxes, or in the social security and Medicare wages blocks of
Form W-2 if the wages are subject to social security and
Medicare taxes.
Claimants must give you either Form W-8BEN or 8233, as
applicable, to obtain these treaty benefits.
Pay during studying and training
(Income Code 19).
This category refers to pay (as contrasted with remittances,
allowances, or other forms of scholarships or fellowship
grants--see Scholarships and Fellowship Grants,
earlier) for personal services performed while a nonresident
alien is temporarily in the United States as a student, trainee, or
apprentice, or while acquiring technical, professional, or business
experience.
Graduated rates.
Wages, salaries, or other compensation paid to a nonresident alien
student, trainee, or apprentice for labor or personal services
performed in the United States are subject to graduated withholding.
A nonresident alien temporarily in the United States as a
nonimmigrant on an "F-1,""J-1,""M-1,"
or "Q-1" visa is not subject to social security and
Medicare taxes on pay for services performed to carry out the purpose
for which the alien was admitted to the United States. Social security
and Medicare taxes should not be withheld or paid on this amount. This
exemption from social security and Medicare taxes also applies to
employment performed under Curricular Practical Training and Optional
Practical Training, on or off campus, by foreign students in
"F-1," "J-1," "M-1" or "Q"
nonimmigrant status as long as the employment is authorized by the
Immigration and Naturalization Service. However, if an alien is
considered a resident alien, as discussed earlier, that pay is subject
to social security and Medicare taxes even though the alien is still
in one of the nonimmigrant statuses mentioned above. This rule also
applies to FUTA (unemployment) taxes paid by the employer.
Any student who is enrolled and regularly attending classes at a
school may be exempt from social security, Medicare, and FUTA taxes on
pay for services performed for that school. See Publication 15
(Circular E).
Tax treaties.
Many tax treaties provide an exemption from U.S. income tax and
from withholding on compensation paid to nonresident alien students or
trainees during training in the United States for a limited period. In
addition, some treaties provide an exemption from tax and withholding
for compensation paid by the U.S. Government or its contractor to a
nonresident alien student or trainee who is temporarily present in the
United States as a participant in a program sponsored by the U.S.
Government (see Table 2). However, a withholding agent who
is a U.S. resident, a U.S. Government agency, or its contractor must
report the amount of pay on Form 1042-S.
Claimants must give you either Form W-8BEN or 8233, as applicable,
to obtain these treaty benefits.
Artists and Athletes
Because many tax treaties contain a provision for pay to artists
and athletes, a separate category--Earnings as an artist or
athlete (Income Code 20)--is assigned these
payments for withholding purposes. This category includes payments
made for performances by public entertainers (such as theater, motion
picture, radio, or television artists, or musicians) or athletes.
Withholding rate.
You must withhold tax at a 30% rate on payments to artists and
athletes for services performed as independent contractors. See
Pay for independent personal services, earlier, for more
information. You must withhold tax at graduated rates on payments to
artists and athletes for services performed as employees. See Pay
for dependent personal services, earlier, for more information.
However, in any situation where the nature of the relationship between
the payor of the income and the artist or athlete is not
ascertainable, you should withhold at a rate of 30%.
Central withholding agreements.
Nonresident alien entertainers or athletes performing or
participating in athletic events in the United States may be able to
enter into a withholding agreement with the IRS for reduced
withholding provided certain requirements are met. Under no
circumstances will a withholding agreement reduce taxes withheld to
less than the alien's anticipated income tax liability.
Nonresident alien entertainers or athletes requesting a central
withholding agreement must provide the following information.
- A list of the names and addresses of the nonresident aliens
to be covered by the agreement.
- Copies of all contracts that the aliens or their agents and
representatives have entered into regarding the time period and
performances or events to be covered by the agreement including, but
not limited to, contracts with:
- Employers, agents, and promoters,
- Exhibition halls,
- Persons providing lodging, transportation, and advertising,
and
- Accompanying personnel, such as band members or
trainers.
- An itinerary of dates and locations of all events or
performances scheduled during the period to be covered by the
agreement.
- A proposed budget containing itemized estimates of all gross
income and expenses for the period covered by the agreement, including
any documents to support these estimates.
- The name, address, and telephone number of the person the
IRS should contact if additional information or documentation is
needed.
- The name, address, and employer identification number of the
agent or agents who will be the central withholding agents for the
aliens and who will enter into a contract with the IRS. A central
withholding agent ordinarily receives contract payments, keeps books
of account for the aliens covered by the agreement, and pays expenses
(including tax liabilities) for the aliens during the period covered
by the agreement.
When the IRS approves the estimated budget and the designated
central withholding agents, the Associate Chief Counsel
(International) will prepare a withholding agreement. The agreement
must be signed by each withholding agent, each nonresident alien
covered by the agreement, and the Commissioner or his delegate.
Generally, each withholding agent must agree to withhold income tax
from payments made to the nonresident alien; to pay over the withheld
tax to the IRS on the dates and in the amounts specified in the
agreement; and to have the IRS apply the payments of withheld tax to
the withholding agent's Form 1042 account. Each withholding agent will
have to file Form 1042 and Form 1042-S for each tax year in
which income is paid to a nonresident alien covered by the withholding
agreement. The IRS will credit the withheld tax payments, posted to
the withholding agent's Form 1042 account, in accordance with the Form
1042-S. Each nonresident alien covered by the withholding
agreement must agree to file Form 1040NR or, if he or she qualifies,
Form 1040NR-EZ.
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A request for a central withholding agreement should be sent to the
following address at least 90 days before the agreement is to take
effect:
Compliance Area Director, Area 15
950 L'Enfant Plaza South, SW
S:C:15
Washington, DC 20024.
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Tax treaties.
Under many tax treaties, compensation paid to public entertainers
or athletes for services performed in the United States is exempt from
U.S. income tax only when the services are performed during a limited
period of temporary presence in the United States and the pay is
within limits provided in the tax treaty that applies (see Table
2).
Independent contractors may claim an exemption from withholding
under a tax treaty by filing Form 8233. Employees may claim an
exemption from withholding under a tax treaty by filing Form 8233 (if
the employee is a student or teacher) or a Form W-8BEN with
their employers.
Often, however, you will have to withhold at the statutory rates on
the total payments to the entertainer or athlete. This is because the
exemption may be based upon factors that cannot be determined until
after the end of the year.
Other Income
For the discussion of Income Codes 24, 25, and 26, see U.S.
Real Property Interest, later. For the discussion of Income Code
27, see Publicly Traded Partnerships, later.
Gambling winnings
(Income Code 28).
Use this code to report gambling winnings and any tax withheld on
those winnings. In general, nonresident aliens are subject to NRA
withholding at 30% on the gross proceeds from gambling won in the
United States if that income is not effectively connected with a U.S.
trade or business and is not exempted by treaty. The tax withheld and
winnings are reportable on Forms 1042 and 1042-S. No tax is
imposed on nonbusiness gambling income of a nonresident alien playing
blackjack, baccarat, craps, roulette, or big-6 wheel in the United
States. A Form W-8BEN is not required to obtain the exemption
from withholding, but a Form W-8BEN may be required for purposes
of Form 1099 reporting and backup withholding. Gambling income that is
not subject to NRA withholding is not subject to reporting on Form
1042-S.
Nonresident aliens are taxed at graduated rates on gambling income
won in the U.S. that is effectively connected with a U.S. trade or
business.
Tax treaties.
Gambling income won in the United States by residents (as defined
by treaty) of the following foreign countries is not taxable by the
United States: Austria, Czech Republic, Denmark, Finland, France,
Germany, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg,
Netherlands, Russian Federation, Slovak Republic, South Africa, Spain,
Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.
Claimants must give you a Form W-8BEN (with a TIN) to claim
treaty benefits on gambling income, from other than blackjack,
baccarat, craps, roulette, or big-6 wheel, that is not effectively
connected with a U.S. trade or business.
Transportation income.
U.S. source gross transportation income is generally not subject to
NRA withholding.
Transportation income is income from the use of a vessel or
aircraft, whether owned, hired, or leased, or from the performance of
services directly related to the use of a vessel or aircraft. U.S.
source gross transportation income includes 50% of all transportation
income from transportation that either begins or ends in the United
States.
For personal service income other than income derived from, or in
connection with, a vessel, the use must be between the United States
and a U.S. possession. The recipient of U.S. source gross
transportation income must pay tax at the rate of 4% unless the income
is effectively connected with the conduct of a U.S. trade or business.
However, the income is not subject to NRA withholding. If the income
is effectively connected with a U.S. trade or business, it is taxed on
a net basis at a graduated rate of tax.
Other income
(Income Code 50).
Use this category to report U.S. source FDAP income that is not
reportable under any of the other income categories. Examples of
income that may be reportable under this category are commissions,
insurance proceeds, patronage distributions, prizes, and racing
purses.
As discussed earlier under Income Subject to NRA Withholding,
every kind of FDAP income from U.S. sources that is not effectively
connected with a U.S. trade or business is subject to NRA withholding
unless the income is specifically exempt under the Code or a tax
treaty. You generally must withhold at the 30% rate on this income.
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