Alert

Making Payments to Non-US Individuals for Services Provided in the US

The deadline for filing Forms 1042-S and 1042 with the IRS is quickly approaching. Without an extension, both forms are due on March 15, 2021.

This filing deadline is particularly important for US companies that make payments to non-US persons who perform services in the United States. These payments are commonly made to consultants, physicians, specialists, graduate students and interns, and higher education professionals.

Understanding and complying with the documentation, reporting, and withholding rules when making payments to non-US individuals can be a complicated process. Below, learn key rules for US entities that make payments to non-US individuals, ways to reduce withholding burdens, and more.

Withholding for Non-US Individuals

When making payments to non-US individuals for services provided in the United States, the standard rule is that 30% tax withholding applies.

However, the United States has income tax treaties with many countries that eliminate tax withholding for residents of those countries who provide services in the United States. If the non-US individual resides in one of these countries and completes the correct documentation, they may qualify for 0% withholding.

Reduce Withholding

To avoid the 30% withholding, non-US individuals may make a treaty claim to reduce the withholding to 0%. To do this, the individual must both:

  • Be a resident of a country that has an income tax treaty with the United States
  • Provide a US Individual Taxpayer ID Number (ITIN) on a valid Form 8233 to make a treaty claim

Most non-US individuals don’t have a US taxpayer ID number and aren’t financially incentivized to endure the lengthy process required to acquire one. Due to these circumstances, the 30% tax withholding requirement often stands.

Payments to Non-US Interns

Companies that hire non-US college or graduate students as interns must pay careful attention to the required documentation and reporting. These steps are often overlooked because it’s assumed that a non-US person working on a visa isn’t subject to withholding or reporting.

Companies that hire these non-US interns outside of the payroll context must still collect the required Form 8233 or W-8BEN and analyze the withholding obligation.

Payments to Non-US Professors

Higher education institutions must also pay careful attention when paying non-US professors or other consultants outside of an employment contract. If the non-US individual doesn’t submit the required documentation to reduce withholding, the 30% withholding requirement still applies.

Practical Solutions for US Payers

Companies have several options when navigating these withholding requirements. The options should be considered and discussed up-front in the contracting process so all involved parties are aware of the potential withholding impact. Non-US individuals who are being paid to perform work in the United States for a contracted amount generally aren’t pleased to learn they’ll receive 30% less.

Facilitate Form 8233 and ITIN Completion

Companies can help facilitate Form 8233 completion and ITIN application, if necessary, at the time of contract. It’s important to inform the non-US individual that the process for getting approved for an ITIN can take months.

This option requires the company hold all payments from the non-US individual until the Form 8233 with the US ITIN can be provided. This option is also only available to non-US individuals who reside in a country that has an income tax treaty with the United States.

Cover Tax Withholding

Companies may also assume responsibility for the taxes themselves to provide the recipient with the amount stated in the contract. This will require the payer to gross up the payment amount reported to the recipient to determine the tax liability and pay more than the required 30% withholding to the IRS.

Payment Details and Withholding Impacts

To reduce withholding impacts, companies must pay careful attention to the payment details. 

Subtract Expenses

Expenses aren’t subject to withholding or reporting. Accordingly, if the non-US individual submits travel expenses separately from their standard fee amount, those payments for documented and reasonable expenses aren’t subject to withholding under the regulations.  However, it’s essential to collect a full and complete record of receipts so the company doesn’t take the risk of the IRS disallowing the expense claim. 

Hire Non-US Entities Rather than Individuals

If a company pays a non-US entity that is a resident of a treaty country, the documentation and withholding impact could be different.

Non-US entities aren’t required to submit a US Taxpayer ID Number (TIN) or complete the Form 8233. They make a standard treaty claim, including Line 15 on an IRS Form W-8BEN-E, and may provide either a US or foreign TIN. This may not always be a practical solution for the individual payee but should be a consideration at the time of contract.

Reduce Time Spent in the United States

If a company hires a non-US individual to do research and present findings, reducing time spent in the United States—versus remotely in the individual’s home country—can lessen the withholding burden.

The reporting and withholding requirements are only triggered when the non-US individual has physical presence in the United States while performing services. If any of the work can be performed remotely, that will reduce the burden. 

Next Steps

The deadline for filing Forms 1042-S and 1042 with the IRS is quickly approaching. Without an extension, both forms are due on March 15, 2021.

To apply for an extension or learn more about the requirements, visit the IRS website.

We’re Here to Help

If you have questions about Forms 1042-S and 1042 or fulfilling withholding requirements for non-US employees, please contact your Moss Adams professional.