Change Country

Tax & Assurance Guidance

Payments of US Source Income to Foreign Parties: Withholding & Reporting

Posted on January 31, 2018 by

Sue Tuson

Sue Tuson

Share This

This time of year businesses are busy preparing year-end information returns, including W-2s and 1099s. Often overlooked are the rules regarding withholding and information reporting related to payments made to foreign persons. The information below is a reminder of the 1042 filing requirements related to payments of certain US source income to foreign persons.

Payments of US Source Income to Foreign Persons
Foreign persons are subject to US tax at a 30% rate on income they receive from US sources that consists of:

  • Interest (including certain original issue discount (OID))
  • Dividends
  • Rents
  • Royalties
  • Premiums
  • Annuities
  • Compensation for, or in expectation of, services performed
  • Substitute payments in a securities lending transaction
  • Other fixed or determinable annual or periodical gains, profits, or income

This tax is imposed on the gross amount paid and is generally collected by withholding under IRC §1441 or 1442 on that amount. A payment is considered to have been made whether directly to the beneficial owner or to another person, such as an intermediary, agent, or partnership, for the benefit of the beneficial owner.

Withholding Agents
The tax is generally withheld (chapter 3 withholding) from the payment made to the foreign person. A withholding agent is a US or foreign person, in whatever capacity acting, with control, receipt, custody, disposal, or payment of an amount subject to chapter 3 withholding. A withholding agent may be an individual, corporation, partnership, trust, association, or any other entity, including any foreign intermediary, foreign partnership, or US branch of certain foreign banks and insurance companies. Withholding agents are personally liable for any tax required to be withheld. This liability is independent of the tax liability of the foreign person to whom the payment is made. If an employer fails to withhold, and the foreign payee fails to satisfy its US tax liability, then both are liable for tax, as well as interest and applicable penalties. The tax will be collected only once. If the foreign person satisfies its US tax liability, employers are not liable for the tax but remain liable for any interest and penalties for failure to withhold.

Withholdable Payment & Rate
Generally, a withholdable payment is a payment of US source fixed or determinable annual or period (FDAP) income such as dividends, interest, royalties, and certain payments for personal services and, beginning in 2019, gross proceeds from the sale or other disposition of property of a type that can produce interest or dividends that are US source FDAP income. Withholding on FDAP income is generally at 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 that the payee is a resident of a country and is claiming a reduced treaty rate. Taxes withheld must be remitted to the IRS via electronic funds transfer (EFTPS) on a timely basis. Specific guidelines vary based on the frequency and amount of withholding.

Information Reporting
Payors of FDAP 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.

If you need assistance in determining your withholding and/or reporting responsibilities, contact Clayton & McKervey.

Sue Tuson


As an international tax advisor, Sue helps businesses structure their operations globally to mitigate tax costs and maximize profits.

Related Insights

Tax & Assurance Guidance

Keeping Up With Digital Taxes

Posted on September 6, 2022 by

Miroslav Georgiev
Sue Tuson
To the uninitiated, selling digital products and services can seem like a much easier business model than selling physical goods. While there may be advantages to skipping inventory and warehouse needs, the digital tax landscape can be tricky to navigate. 

Tax & Assurance Guidance

Insights from Washington: Inflation Reduction Act Signed

Posted on August 19, 2022 by

Sarah Russell
On August 7, 2022, the U.S. Senate approved the Inflation Reduction Act of 2022, a bill to finance climate and energy provisions and an extension of the enhanced Affordable Care Act (ACA) subsidies totaling $369 billion in additional spending.

Tax & Assurance Guidance

Insights from Washington: Senate Passes the Inflation Reduction Act

Posted on August 9, 2022 by

Nick Lloyd
On August 7, 2022, the U.S. Senate approved the Inflation Reduction Act of 2022, a bill to finance climate and energy provisions and an extension of the enhanced Affordable Care Act (ACA) subsidies totaling $369 billion in additional spending.

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content