Every United States person that makes payments of fixed, determinable, annual, or periodical (“FDAP”) income (such as dividends, interest, royalties, and certain payments for personal services) to a foreign payee (including non-resident aliens, foreign partnerships, foreign corporations, and non-resident aliens or foreign fiduciaries of estates or trusts) is required to withhold US income taxes. The US payor (withholding agent) is responsible to withhold tax at the time the payment is made, deposit tax, and file timely reports. This article addresses the documents required from the foreign payee, the timing of withholding tax remittance to the IRS, and the reporting of the 1042 series after year-end.
Withholding on FDAP income is generally a statutory rate of 30%; however, if the payee is a resident of a country that has a tax treaty with the United States, the rate may be reduced. Payors should procure a form W-8BEN (individuals) or W-BEN-E (entities) from the payee to certify the payee is a resident of a country and is claiming a reduced treaty rate. The forms are also used to certify the payee’s status of Foreign Account Tax Compliance Act (“FATCA”). Without proper documentation from the payee, the US payor must withhold tax at 30%. The US payor is responsible for submitting the correct amount of tax to the IRS.
In general, Form W-8BEN-E will remain valid until the last day of the third calendar year following the year in which the form is signed. For example, Form W-8BEN-E signed on June 30, 2015, remains valid through December 31, 2018. It’s important for a withholding agent develop a process to track the expiration date and make sure a new form is obtained within 30 days after the old one expires.
If US persons remit payments to a foreign person for services performed outside the US, it is recommended they indicate the services are performed outside the US in the contract; otherwise the services would be presumed to be performed in the US, and might be subject to withholding tax.
Withholding Tax Remittance
Taxes withheld must be remitted to the IRS via
electronic funds transfer (“EFTPS”) on a timely basis. The frequency of tax remittance depends upon the amount of withholding tax. Specific guidelines are provided below:
- Annual deposits (due on March 15 of the following calendar year) – when the aggregate amount of withholding tax is less than $200.
- Monthly deposits (due within 15 days after the close of such month) – when the withholding tax is greater than $200 but less than $2000.
- Quarter-monthly deposits (due within 3 banking days after the close of such quarter-monthly period, i.e., 7th, 15th, 22nd and last day of the month) – when the withholding tax is greater than $2000.
Payors of FDAP payments to foreign payees are required to prepare Form 1042-S and Form 1042-T, and provide the information to each payee and the Internal Revenue Service no later than March 15 of the year following the payment. In addition, the payor must complete Form 1042, which is a reconciliation of the withholding taxes due and paid for the year. Form 1042 is also due no later than March 15. These forms are required even if no tax is required to be withheld under a treaty.
It is important to note that a traditional income tax extension does not extend the time to file the Forms 1042-S and 1042-T. A 30-day extension for the filing of these forms will be automatically granted if Form 8809 is filed. A separate 30-day extension request letter for recipient copy of the Form 1042-S must be sent to the IRS center. An automatic six-month extension for filing the Form 1042 can be requested by filing Form 7004.