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Income Tax Withholding on payments to Foreign Recipients of U.S. Income

posted Sep 28, 2014, 7:18 PM by Zaher Fallahi   [ updated Oct 24, 2014, 11:08 PM ]

Banks and, other financial institutions or any US persons, including US legal entities such corporation, who pay U.S. source income to nonresident aliens and other foreign persons, are required to report this income on Form 1042-S, titled “Foreign Persons' U.S. Source Income Subject to Withholding”. This income is subject to a statutory flat tax rate of 30 percent. However, this rate is frequently reduced or eliminated by an income tax treaty or statutory exemption. Income that is exempt from taxation because of a tax treaty or certain other exemptions must still be reported. U.S. individuals, corporations, or other entities paying U.S. source income to foreign persons are required to withhold taxes on this income (except where statutory or treaty exemptions apply) or to appoint a withholding agent (normally a U.S. financial institution) to do so. Foreign financial institutions that enter into an agreement with the Internal Revenue Service (IRS), known as qualified intermediaries (QIs), may also serve as withholding agents. A withholding agent or QI is fully liable for all taxes owed by a foreign beneficial owner and also reports the income paid to each recipient on a Form 1042S. Without this withholding requirement, there would be no effective way to enforce taxpayer compliance because foreign recipients are generally not required to file U.S. tax returns to report this income.

Zaher Fallahi, CPA has specialized as Orange County Dental CPA and Doctor’s CPA, and Los Angeles Dental CPA and Doctor’s CPA since 1992. Los Angeles (310) 719-1040 and Orange County ( 714) 546-4272 or e-mail :