Requirements for Withholding on Payments to Foreign Vendors
November 13, 2018 — Whether one makes payments to foreign individuals or foreign businesses, there are specific tax rules that one needs to consider.
A withholding agent must withhold 30% of any payment of an amount subject to withholding made to a payee that is a foreign person. A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code) or any other entity. The 30% is withheld unless the payment can be associated with documentation that can be relied upon to treat the payment as made to a payee that is a U.S. person, or a beneficial owner that is a foreign person entitled to a reduced rate of withholding under a U.S. tax treaty.
Generally, an amount is subject to withholding if it is an amount from sources within the United States that is fixed or determinable, annual or periodical income. This consists of all gross income, including interest, dividends, rents, royalties, and compensation. It does not include most gains from the sale of property (although real property sales may be subject to withholding).
Failure to withhold when required results in the payor being liable for the tax plus penalty and interest.
Before making a payment to a foreign person or entity, taxpayers should request one or more of the Form W-8 series forms or Form 8233 from the payee that you believe to be a foreign person. The form you request will be dictated by what type of entity and status the payee is/has. This is a complicated analysis.
Form W-8BEN: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)
Form W-8BEN-E: Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)
Form W-8ECI: Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the Unites States.
Form W-8EXP: Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting.
Form W-8IMY: Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting.
Form 8233: Request this form from any foreign independent contractor and any foreign student, professor, teacher or researcher employee to which you are making a payment if they are eligible for a reduced withholding rate.
Form W-9: Request for Taxpayer Identification Number and Certification.
In addition to the above forms, an annual informational return may be required. Recipient and IRS reporting to foreign person(s) with US source income subject to withholding is done on Form 1042-S (due by March 15, 2019 to the recipient and the IRS). To report the number of these forms filed and the tax withheld, use Form 1042 (due by March 15, 2019), Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
The reporting of payments to a foreign person can be complicated and subject to special reporting. If you have questions regarding the reporting of payments made to foreign vendors, contact your tax advisor today.
Gloria McDonnell, CPA
Gloria McDonnell is a partner, the tax operations director, and serves on the leadership team at Redpath and Company. She specializes in corporate and individual tax planning and compliance, multi-state taxation, international tax, and tax research. Gloria works with closely-held businesses in a variety of industries, and has provided business tax accounting services since 1989, and has been at Redpath and Company since 1996.
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