Manage IRS Rules for Withholding of Taxes on Payments to Foreign Workers and Entities

April 20, 2012 — 1,570 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

The Internal Revenue Service (IRS) tracks U.S. source income provided to foreign workers when they earn more than $140 billion in a year. A business or individual that makes a payment of U.S. source income to a foreign person or entity must withhold the proper amount of tax, and report this information on Form 1042-S.

Handling the withholding of taxes often requires a substantial time commitment from a company's human resource professionals, but you can use this information to manage these foreign taxes.

A withholding agent is responsible for withholding U.S. income tax at a rate of 30 percent. This must be reported to the IRS by March 15 of the following year, and failing to do so could result in a 5 percent unpaid tax penalty for each month the tax is late. This violation will continue until it reaches 25 percent of the unpaid tax.

Additionally, you must understand income subject to withholding to properly process these taxes. Payments to foreign employees are subject to withholding if they come from sources within the United States, of if they are considered fixed, determinable, annual or periodical (FDAP) income. Additionally, they may result from gains in the disposition of natural goods such as coal and iron ore or an exchange of patents and copyrights.