Is Payment Subject to Withholding?
Almost all payments to foreign persons are potentially subject to withholding.
The only categorical exceptions are:
• Qualified scholarships, i.e. directly tied to instruction and achieving a degree (tuition, books and course materials, lab fees)
• Expense reimbursements
• Payments for goods manufactured outside the U.S.
Payment types that are subject to withholding:
• Payments for services
• Royalties, licenses
• Prizes, awards
• Non-qualified scholarship, fellowship, stipends
Most payments subject to withholding have a withholding rate of 30%. Withholding rate for non-qualified scholarship, non-qualified fellowship, stipend payments is 13% - 15%. AP must withhold at the time of payment and submit withheld amount to IRS.
For a foreign person/entity to successfully claim an exemption from all or part of the withholding, payee must:
• Claim an existing tax treaty with the U.S. and
• Provide an acceptable Tax ID
Tax treaty is claimed via Form W8-BEN or 8233.
Certain other statuses may allow for exemption.
Only certain countries have a tax treaty with the U.S. under tax treaties. Residents (not necessarily citizens) of foreign countries are exempt from US income tax or are taxed at a reduced rate on certain types of income received from a US source.
Length of Stay
For certain payments (mostly managed by Payroll), if a foreign person has spent over a certain number of days in the U.S. (see Substantial Presence Test), they are not able to claim tax treaty.
Acceptable Tax ID Numbers Issued By IRS & SSA
• Social Security Number (SSN)
• Employer Identification Number (EIN)
• Individual Taxpayer Identification Number (ITIN)
Unacceptable Numbers for Claiming a Tax Treaty
• Passport Number
• Visa Number
• Foreign Tax ID Number