Service note: We advise on U.S. withholding taxes for non-U.S. persons (individuals and entities), prepare the right W-8/8233 documentation, and reconcile 1042-S/8805/FIRPTA statements with your U.S. returns. Learn more: Withholding Tax Service.
U.S. Withholding Taxes for Non-U.S. Persons (Overview & Practical Guide)
What “withholding” means. When U.S.-source income is paid to a non-U.S. person, the payer (the withholding agent) may be required to withhold U.S. tax and remit it to the IRS. The default rate for many fixed or determinable annual or periodical (FDAP) payments—such as interest, dividends, royalties, certain service fees performed in the U.S., and some scholarships—is 30%, unless reduced or eliminated by a tax treaty or other rule.
FDAP vs. ECI. FDAP is generally passive or one-off income and is subject to gross-basis withholding. Effectively Connected Income (ECI) is income connected with a U.S. trade or business and is taxed on a net basis by filing a U.S. return (e.g., Form 1040-NR/1120-F). ECI is not subject to the 30% FDAP withholding when you certify ECI status to the payer (Form W-8ECI), but it does trigger return-filing obligations.
Claiming treaty benefits. Many non-U.S. persons can reduce withholding on specific income types by claiming a double tax treaty rate. Individuals certify status and treaty claim on Form W-8BEN; entities use Form W-8BEN-E and must also state their FATCA status. Treaty claims often require a U.S. taxpayer identification number (e.g., an ITIN) and meeting Limitation on Benefits (LOB) conditions.
Documentation matters. The correct form depends on the facts: W-8BEN/W-8BEN-E (foreign beneficial owner, treaty claims), W-8ECI (income is ECI), W-8EXP (certain exempt organizations/governments), W-8IMY (intermediaries/flow-throughs with withholding statements), and Form 8233 (individual services/scholarships claimed as treaty-exempt). W-8 forms are generally valid until the end of the third calendar year after signature, unless a change in circumstances occurs, in which case you must provide an updated form within 30 days.
FATCA overlay (Chapter 4). Separately from Chapter 3 (the 30% FDAP regime), FATCA may impose a 30% withholding on certain U.S.-source FDAP paid to nonparticipating financial institutions or undocumented payees. Entities certify their FATCA status on W-8BEN-E or W-8IMY; individuals typically use W-8BEN.
Partnership ECI withholding (Section 1446). U.S. partnerships must withhold on ECI allocable to foreign partners: §1446(a) (operating ECI) and §1446(f) (withholding on transfers of partnership interests). Partners receive Form 8805 as a creditable statement; the partnership files Forms 8804/8813.
Real estate (FIRPTA, §1445). A buyer must generally withhold FIRPTA tax on a non-U.S. person’s disposition of U.S. real property interests (typically 15% of gross proceeds, subject to exceptions/reductions). The buyer files Forms 8288/8288-A; the seller may request a reduced rate via Form 8288-B when the estimated income tax is lower.
Payroll & personal services. Pay for services performed in the U.S. by nonresident individuals is generally taxable; treaty exemptions (and some scholarship/fellowship exemptions) may be claimed on Form 8233. Wages can be reported on Form W-2 (taxed) or Form 1042-S (treaty-exempt). Services performed outside the U.S. are not U.S.-source and usually not subject to U.S. withholding.
What you will receive from the payer. Withholding agents issue information statements such as Form 1042-S (FDAP/treaty items), Form 8805 (partner ECI withholding), and Form 8288-A (FIRPTA). Keep these to claim credits/refunds on your U.S. return.
Filing to reconcile or reclaim. If too much tax was withheld—or if you must report ECI—you generally file Form 1040-NR (individuals) or Form 1120-F (foreign corporations). Attach copies of 1042-S/8805/8288-A to claim credits. An ITIN may be required.
Withholding agent obligations (for payers). Collect, validate, and maintain documentation (W-8/W-9/8233/withholding statements), withhold/deposit tax, and file annual returns: Form 1042 (tax return for Chapter 3/4 withholding) and Forms 1042-S to recipients, plus Form 1042-T transmittal. Backup withholding (Form 945) generally applies to U.S. persons lacking TINs—distinct from FDAP withholding on foreigners.
Common pitfalls. Wrong W-8 form, missing ITIN for treaty claims, assuming services abroad are U.S.-source, ignoring 1446(f) on partnership interest transfers, or missing FIRPTA certificates can all lead to over-withholding, penalties, or delayed refunds.
Withholding Taxes – Frequently Asked Questions
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It’s tax the payer withholds on U.S.-source income paid to foreign persons and remits to the IRS. For many FDAP payments, the default rate is 30% unless a treaty or exception applies.
Typical FDAP categories include dividends, portfolio interest (with exceptions), royalties, rents, certain U.S.-performed service fees, and some scholarships/fellowships. Treaty rules can change the rate by income type.
FDAP is generally passive, gross-basis income subject to withholding. ECI is connected with a U.S. trade or business, taxed on a net basis by filing a U.S. return; properly certified ECI (W-8ECI) is not subject to the 30% FDAP withholding.
Provide the payer with a Form W-8BEN (individual) or W-8BEN-E (entity) that includes your treaty claim, residency, and (often) a U.S. TIN/ITIN. You must satisfy the treaty’s Limitation on Benefits and other conditions.
W-8BEN (individuals), W-8BEN-E (entities), W-8ECI (income is ECI), W-8EXP (exempt organizations/governments), W-8IMY (intermediaries/flow-throughs, with withholding statements). Use the form that matches your status and the payment type.
Individuals use Form 8233 to claim a treaty exemption for compensation for personal services performed in the U.S. (and certain scholarships/fellowships). W-8BEN covers most non-service FDAP items like dividends and royalties.
An additional 30% regime that can apply to certain U.S.-source FDAP paid to nonparticipating financial institutions or undocumented payees. Entities certify FATCA status on W-8BEN-E or W-8IMY.
U.S. partnerships withhold on ECI allocable to foreign partners (§1446(a)) and on transfers of partnership interests (§1446(f)). The partner receives Form 8805 showing creditable withholding.
Buyers withhold on dispositions of U.S. real property interests by foreign sellers (generally 15% of gross). They file Forms 8288/8288-A; sellers can request a reduced rate via Form 8288-B when the actual tax will be lower.
Often yes—especially for individuals claiming treaty rates on W-8BEN or filing a 1040-NR to reclaim over-withholding. Some payments allow limited claims without a TIN, but a TIN helps avoid backup or default rates.
Generally through the end of the third calendar year after signature. If your facts change (e.g., residency, entity status, beneficial owner), you must provide a new form within 30 days of the change.
FDAP/treaty items come on Form 1042-S; partnership ECI withholding on Form 8805; FIRPTA on Form 8288-A; wages on Form W-2 (taxed) or 1042-S (treaty-exempt wages/scholarships).
Yes. File a U.S. return (1040-NR or 1120-F) and attach your information statements to claim credits. Refunds depend on your treaty eligibility and actual income/tax computation.
Generally no—services performed entirely outside the U.S. are foreign-source. Document your status (often W-8BEN/W-8BEN-E) and where services are performed to avoid unnecessary withholding.
Amounts for tuition/required fees may be nontaxable; stipends/living allowances can be taxable and subject to withholding unless a treaty exemption applies. Use Form 8233 (or W-8BEN in some cases) to claim treaty benefits.
Royalties for the use of intellectual property in the U.S. are U.S.-source FDAP and subject to 30% withholding unless reduced by treaty. Proper W-8 and treaty analysis are key.
Do not sign a W-9 if you are not a U.S. person. Provide the correct W-8 or 8233. Supplying a W-9 can trigger incorrect reporting and backup withholding.
Withholding agents must deposit withheld tax, furnish Forms 1042-S to recipients, and file Form 1042 (annual return) with 1042-T transmittal. Partnerships file 8804/8805/8813; FIRPTA buyers file 8288/8288-A. Deadlines vary—plan ahead.
Using the wrong W-8, missing an ITIN for treaty claims, not updating after a change in status, ignoring §1446(f) on partnership transfers, or failing to file a return to recover over-withholding.
We prepare W-8/8233 packages, review treaty eligibility, and reconcile 1042-S/8805/8288-A with your 1040-NR/1120-F. See our Withholding Tax Service or contact us.
Need help reducing withholding, avoiding errors, or reclaiming over-withheld tax? Explore our service or get in touch.