IRS publication 515 is a document of the Internal Revenue Service (IRS). This document explains the various issues related to withholding of tax on nonresident aliens and other foreign entities. The IRS 515 is to guide business entities that pay income to workers from other foreign countries. The document is applicable to withholding of tax for all foreign individuals, organizations, businesses, or trusts. The document clearly mentions those responsible for withholding tax from such persons or entities and the IRS terms them as withholding agents. The document also clarifies on the types of taxes that are subject to withholding and the process of withholding of such taxes by the withholding agents.
Withholding for Foreign Workers
Foreign workers earning an income through work from the U.S. is considered as nonresident alien (NRA) by the IRS. The tax withheld from such persons is NRA withholding, quite different from the regular withholding of income tax applicable to U.S. citizens and resident aliens. The taxation on U.S. citizens and resident aliens is on their worldwide income. However, for nonresident aliens, the taxation is only on their income from U.S. work. Typically, the withholding percentage for nonresident aliens and other entities is 30% but it varies between 28% and 39.6% in 2013. Still, the IRS allows certain exemptions through this IRS publication 515, which could lower this percentage.
How to Withhold From Foreign Entities
The IRS 515 states that certain additional withholding rules would be operative from 2014 under Chapter 4 of the Internal Revenue Code determined by the Foreign Account Tax Compliance Act (FATCA). If you have any doubt about the resident status or the nonresident status of any individual person or other entities, you should refer to IRS publication 519 that explains such status clearly. The IRS 515 states that you should report all NRA withholdings on IRS form 1042-S and file the tax return on IRS form 1042. However, you should use IRS form 1099 and withhold the backup withholding rate of 28% if
- failure to have a payee certified properly
- if the TIN is wrong, the IRS contacts you
- A taxpayer identification number (TIN) was not submitted properly
- A payee has not been properly reported and there was notification
Usually, all U.S.recipients who are non-exempt should provide a TIN on IRS form W-9. However, foreign persons providing IRS form W-8BEN, IRS form W-8ECI, or IRS form W-8EXP would be eligible for exemption for such backup withholding and reporting on IRS form 1099. The withholding agent should determine the status of the payee only on the basis of the documentation that the payee provides. However, the withholding agent should apply the presumption rules described in the IRS publication 515, if the withholding agent has not received any documentation or is unable to associate part or all of the payment reliably with the documentation.
The IRS publication 515 is definitely a complicated document and hence, you should study this thoroughly if you are making payments to nonresident aliens and foreign entities. You should consult a U.S. tax expert, if you have further doubts.