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Withholding on Specific Income This section discusses the specific types of income that are subject to withholding. This discussion is organized using the same income types and codes used on Form 1042-S (discussed later), and in most cases on Tables 1 and 2 found at the end of this publication. Chart B. Withholding Tax Rates You must withhold tax at the statutory rates shown in Chart B unless a reduced rate or exemption under a tax treaty applies. For U.S. source gross income that is not effectively connected with a U.S. trade or business, the rate is usually 30%. Generally, you must withhold the tax at the time you pay the income to the nonresident alien individual, foreign partnership, or foreign corporation. However, a domestic partnership must withhold the tax on a foreign partner's distributive share of income, even if it has not been distributed. See Partnership distributions under Income Subject to Withholding, earlier. Interest Interest paid to foreign payees is generally subject to withholding. A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is treated the same as the interest on the transferred security. Interest paid by U.S. obligors--general (Income Code 1). With specific exceptions, such as portfolio interest, you must withhold on interest paid or credited on bonds, debentures, notes, open account indebtedness, governmental obligations, or other evidences of indebtedness of U.S. obligors (other than those specifically described later under Income Codes 2, 3, and 4). It also includes unstated interest on certain deferred payment arrangements as provided in section 483 of the Internal Revenue Code. U.S. obligors include the U.S. Government or its agencies or instrumentalities and any U.S. resident. If, in a sale of a corporation's property, payment of the bonds or other obligations of the corporation is assumed by the buyer, that buyer, whether an individual, partnership, or corporation, must deduct and withhold the taxes that would be required to be withheld by the selling corporation as if there had been no sale or transfer. Also, if interest coupons are in default, the tax must be withheld on the gross amount of interest whether or not the payment is a return of capital or the payment of income. Claims for refund may be filed. A resident alien individual paying interest on a margin account maintained with a nonresident foreign brokerage firm must withhold from the interest whether the interest is paid directly or constructively. A foreign tax-exempt organization may claim exemption from withholding of tax on bond interest coupons presented for payment in the United States, but will be subject to withholding for any tax year in which the organization is a private foundation. Interest on bonds of a U.S. corporation paid to a foreign corporation not engaged in a trade or business in the United States is subject to withholding even though the interest is guaranteed by a foreign corporation that made payment outside the United States. Domestic corporations must withhold on interest credited to foreign subsidiaries. Original issue discount. If a bond or other evidence of indebtedness is an original issue discount obligation, the investor is subject to withholding on the original issue discount (OID) accrued while the obligation was held by the nonresident investor. However, a payment on the original issue discount obligation is taken into account as OID only to the extent that the discount was not previously taken into account, and only to the extent the tax on the OID does not exceed the interest payment less the tax on that payment. For information on the sale or exchange of an original issue discount obligation, see Certain Gains, later. The term "original issue discount obligation" does not include any obligations payable 183 days or less from the date of original issue (without regard to the period held by the taxpayer). It also does not include any obligation the interest on which is tax exempt under any provision of law without regard to the identity of the holder. These provisions apply to obligations issued after March 31, 1972. Original issue discount on obligations issued before April 1, 1972, is not subject to withholding. For more information on original issue discount, see Publication 550, Investment Income and Expenses. Interest not subject to withholding. The following types of interest of U.S. obligors paid to a foreign payee are not subject to withholding. Interest on deposits. Interest that is not connected with a U.S. trade or business is not subject to withholding if it is from: Deposits with persons carrying on the banking business, Deposits or withdrawable accounts with savings institutions chartered and supervised under federal or state law as savings and loan or similar associations, such as credit unions, if the interest is or would be deductible by the institutions, or Amounts left with an insurance company under an agreement to pay interest on them. Deposits include certificates of deposit, open account time deposits, Eurodollar certificates of deposit, and other deposit arrangements. You may have to file Form 1042-S to report certain payments of interest on deposits. See Interest payments to a nonresident alien individual who resides in Canada and is not a U.S. citizen under Returns Required, later. Payer having income from abroad. In general, interest received from a resident alien individual or a domestic corporation is not subject to withholding if at least 80% of the payer's gross income from all sources has been from active foreign business for the 3 tax years of the payer before the year in which the interest is paid, or for the applicable part of those 3 years. However, limits apply if the recipient is considered to be a related person. See sections 861(a) and 861(c) of the Internal Revenue Code. Bankers' acceptances. Income of a foreign central bank of issue from bankers' acceptances is not subject to withholding. A foreign central bank of issue is a bank that has by law or government sanction the main authority, other than the government itself, to issue instruments intended to circulate as currency. This type of bank generally is the custodian of the banking reserves of the country under whose laws it is organized. Sales of bonds between interest dates. Do not withhold tax on accrued interest you paid in connection with the purchase of bonds between interest dates. Income from U.S. Savings Bonds of residents of the Ryukyu Islands or the Trust Territory of the Pacific Islands. Do not withhold tax on interest from a Series E, Series EE, Series H, or Series HH U.S. Savings Bond if the nonresident alien individual acquired the bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands. Interest on obligations of the United States received by a foreign central bank of issue or the Bank of International Settlements is not subject to withholding. Portfolio interest. You need not withhold tax on portfolio interest. To qualify as portfolio interest, the interest must be otherwise subject to 30% withholding tax and must be paid on obligations issued after July 18, 1984, that meet certain requirements. Original issue discount may qualify as portfolio interest. Obligations that are not registered. Portfolio interest includes interest paid on any obligation that is not in registered form (bearer obligations) and that is foreign-targeted. A bearer obligation is foreign-targeted if: There are arrangements to ensure that the obligations will be sold, or resold in connection with the original issue, only to a person who is not a United States person, Interest on the obligation is payable only outside the United States and its possessions, and The face of the obligation contains a statement that any United States person who holds the obligation will be subject to limits under the United States income tax laws. The interest on bearer obligations meeting these requirements is portfolio interest. Registered obligations. Portfolio interest includes interest paid on an obligation that is in registered form, and for which the United States person (including a foreign paying agent of an issuer who is a United States person) who would otherwise be the withholding agent on this interest has received a statement that the beneficial owner of the obligation is not a United States person. If the obligation is not targeted to foreign markets, a statement made by the beneficial owner of the obligation must meet the following requirements: It is signed by the beneficial owner under penalties of perjury, It certifies that the owner is not a United States person, or if an individual, that the owner is not a citizen or a resident of the United States, and It provides the name and address of the beneficial owner. The statement may be made, at the option of the withholding agent, on a Form W-8, or on a substitute form. The beneficial owner must inform the withholding agent of any changes in the information on the statement within 30 days of the change. If the obligation is not targeted to foreign markets, a financial institution must send to the withholding agent a statement signed under penalties of perjury by an authorized representative. It must state that the institution has received from the beneficial owner a Form W-8 or a substitute form, or that it has received from another financial institution a similar statement that it, or another institution, has received a Form W-8 or a substitute form from the beneficial owner. The statement must provide the name and address of the beneficial owner. A copy of the Form W-8, provided by the beneficial owner, must be attached. The withholding agent who receives a statement must file a Form 1042-S for the payment for which the statement is required for the calendar year in which payment is made. Expiration of Form W-8 and statement. If you hold an old form that was valid on or after January 1, 1999, and it expires under the current regulations or solely because of changes in the circumstances of the person providing the form, you can get an old form or a new form during 2000. However, the old form will not be valid after December 31, 2000. See New Forms, earlier. Registered obligations targeted to foreign markets. The Form W-8 or substitute statement is not required for interest paid on a registered obligation that is targeted to foreign markets if the interest is paid by a United States person to a registered owner that is a financial institution at an address outside the United States. In this case, the interest is treated as portfolio interest if the withholding agent does not have actual knowledge that the beneficial owner is a United States person and receives a certificate, documentary evidence, or statement from a financial institution or member of a clearing organization, which member is the beneficial owner. No particular form is required for the certificate or documentary evidence. However, see section 35a.9999-5(b), A-14 of the temporary regulations, for what the certificate or documentary evidence must contain. If the person providing the certificate has not provided a previous certificate for an obligation, the certificate must be provided within the period beginning 90 days before the first interest payment date. If it is not received by the date 30 days prior to the payment, the withholding agent may withhold tax. Thereafter, the certificate must be filed within the period beginning January 15 and ending on January 31 of each year. If the withholding agent pays interest to the beneficial owner (neither a financial institution nor a member of a clearing organization), the owner must provide the withholding agent a Form W-8 or substitute statement. However, a withholding agent that is a foreign branch of a U. S. financial institution need not receive a Form W-8 or substitute statement if the withholding agent receives from the beneficial owner documentary evidence that the beneficial owner is not a United States person. Documentary evidence must be provided within the period beginning 90 days before the first interest payment date. The beneficial owner must confirm the continuing validity of the documentary evidence within the period beginning 90 days before the first day of the third calendar year following the provision of the evidence and during the same period every three years thereafter while still the owner. A registered obligation is targeted to foreign markets if it is sold (or resold in connection with its original issuance) only to foreign persons or to foreign branches of U. S. financial institutions in accordance with procedures similar to those provided under section 1.163-5(c)(2)(i) of the regulations. Nonqualifying payees. Interest paid to a 10% shareholder is not portfolio interest and does not qualify for the exemption from withholding. For an obligation issued by a corporation, a "10% shareholder" is any person who owns at least 10% of the total combined voting power of all classes of voting stock of the corporation. For an obligation issued by a partnership, a "10% shareholder" is any person who owns at least 10% of the capital or profits interest in the partnership. Generally, the constructive ownership of stock rules apply in determining if a person is a 10% shareholder of a corporation. Similar rules will apply in determining the ownership of the capital or the profits interest in a partnership. For payments to foreign corporations, portfolio interest does not include interest that is paid to: A bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business, except for interest paid on an obligation of the United States, A 10% shareholder (described above), or A controlled foreign corporation from a related person. Contingent interest rule. Portfolio interest generally does not include contingent interest. Contingent interest is any of the following: Interest that is determined by reference to: Any receipts, sales, or other cash flow of the debtor or related person, Income or profits of the debtor or related person, Any change in value of any property of the debtor or a related person, or Any dividend, partnership distributions, or similar payments made by the debtor or a related person, and Any other type of contingent interest that is identified by the Secretary of the Treasury in regulations. The term "related person" is defined in section 871(h)(4)(B) of the Internal Revenue Code. Exceptions. The contingent interest rule does not apply to any interest paid or accrued on any indebtedness with a fixed term that was issued: By April 7, 1993, or After April 7, 1993, pursuant to a written binding contract in effect on that date and at all times thereafter before that indebtedness was issued. Also, the contingent interest rule does not apply to interest described in subparagraph (C) of section 871(h)(4). Interest on real property mortgages (Income Code 2). Because there is no reduced rate or exemption under some tax treaties for interest paid or credited on real property mortgages, it is assigned a separate category for withholding purposes. This is interest paid on any type of debt instrument that is secured by a mortgage or deed of trust on real property located in the United States, regardless of whether the mortgagor (or grantor) is a U.S. citizen or a U.S. business entity. Interest paid to controlling foreign corporations (Income Code 3). Under some tax treaties, there is no reduced rate or exemption for interest paid by a U.S. corporation to a controlling foreign corporation. This is interest that is paid or credited by a domestic corporation (as contrasted with a resident foreign corporation) on borrowings from a controlling foreign corporation. The interest may be on any type of debt including open or unsecured accounts payable, notes, certificates, bonds, or other evidences of indebtedness. A controlling foreign corporation is a corporation of the treaty country that controls, directly or indirectly, more than 50% of the entire voting power of the paying corporation. Interest paid by foreign corporations (Income Code 4). If a foreign corporation is engaged in a U.S. trade or business, any interest paid by the foreign corporation's trade or business in the United States is subject to withholding as if paid by a domestic corporation. 30% rate. If there is no treaty provision or exemption under the Internal Revenue Code, you must withhold tax at the statutory rate of 30% on the interest paid by a foreign corporation's U.S. trade or business. Tax treaties. In general, recipients of interest from a U.S. trade or business of a foreign corporation are entitled to reduced rates of, or exemption from, tax under a treaty in the same manner and subject to the same conditions as if they had received the interest from a domestic corporation. However, a foreign corporation that receives interest paid by a U.S. trade or business of a foreign corporation must also be a qualified resident of its country of residence to be entitled to benefits under that country's tax treaty. Alternatively, a recipient may be entitled to treaty benefits under the payor's treaty if there is a provision in that treaty that applies specifically to interest paid by foreign corporations. This provision may exempt all or a part of this interest. Some treaties provide for an exemption regardless of the payee's residence or citizenship; others provide for an exemption according to the payee's status as a resident or citizen of the payor's country. A foreign corporation that pays interest must be a qualified resident of its country of residence for the recipient to be entitled to treaty benefits with respect to that interest. You should check the specific treaty provision. Table 3 at the end of this publication provides a list of the tax treaties and, if published, the Internal Revenue Cumulative Bulletins in which they appear. Dividends The following types of dividends paid to foreign payees are generally subject to withholding. A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is treated the same as a distribution on the transferred security. Dividends paid by U.S. corporations -- general (Income Code 6). This category includes all distributions of domestic corporations (other than dividends paid by a U.S. subsidiary corporation to a foreign parent corporation--Income Code 7). Subject to certain exceptions, you must withhold tax on the gross amount of all corporate distributions paid to nonresident payees, to the extent treated as gross income from sources within the United States. Do not withhold tax on a nontaxable distribution payable in stock or stock rights, or a distribution that is treated as a distribution in part or full payment in exchange for stock. If part of the distribution is taxable, you must withhold on the entire distribution. You must withhold tax on a domestic corporation's cash distribution made on its stock in the ordinary course of its business to foreign shareholders. You must withhold even though it may be later determined that part or all of the distribution is a return of capital or a gain from the sale or exchange of property. Capital gain dividends paid by a regulated investment company or real estate investment trust generally are not subject to withholding. However, capital gain dividends paid by a real estate investment trust are subject to withholding at a 35% rate as discussed later under U.S. Real Property Interest. Dividends paid to a shareholder whose status is not definite. If the shareholder's address is in the United States, you may assume that the shareholder is a citizen or resident of the United States or a domestic partnership or corporation. Unless the facts and circumstances indicate clearly that the shareholder is a nonresident alien, foreign partnership, or foreign corporation, an address in care of another person in the United States does not of itself warrant treating the shareholder as a nonresident alien, foreign partnership, or foreign corporation. However, if you do not definitely know the status of a shareholder, you must withhold the tax if the shareholder's address is outside the United States. If a shareholder changes from an address outside the United States to an address in the United States, you must withhold the tax unless you receive proof showing that the individual is a citizen or resident of the United States. (A shareholder may claim U.S. citizenship or residence by filing a statement or Form 1078, as discussed, earlier under Withholding Exemptions and Reductions.) After 2000, you must get a certificate from the payee to determine if withholding is required on the dividends paid. See New Forms, earlier. Dividends paid by a domestic corporation (an "80/20" company). Generally, a percentage of any dividend paid by a domestic corporation that received at least 80% of its gross income from an active foreign business for the testing period (the 3 tax years before the year in which the dividends are declared, or shorter period if the corporation was not in existence for 3 years) is not subject to withholding. The percentage is found by dividing the corporation's foreign gross income for the testing period by the corporation's total gross income for that period. Main business in Puerto Rico or the Virgin Islands. Dividends paid by a domestic corporation that generally conducts its main business activities in Puerto Rico or the Virgin Islands and that has chosen the Puerto Rico economic activity credit or the possession tax credit are not subject to withholding. Jointly-owned stock. If stock is owned jointly by a nonresident alien individual and the U.S. citizen spouse of that individual, you must withhold tax only on the amount of the dividends considered paid to the nonresident alien. Consent dividends. If the corporation receives a Form 972, Consent of Shareholder To Include Specific Amount in Gross Income, from a nonresident alien or other foreign shareholder who agrees to treat the amount as a taxable dividend, the corporation must pay and report on Form 1042 and Form 1042-S any withholding tax it would have withheld if the dividend had been actually paid. Dividends paid by U.S. subsidiaries to foreign parent corporations (Income Code 7). Under certain tax treaties, there are reduced withholding rates for dividends from a U.S. subsidiary corporation to a foreign parent corporation. Accordingly, these dividends are a separate category for purposes of correctly applying the withholding rules. The payment to a foreign corporation of a deemed dividend under section 304(a)(1) of the Internal Revenue Code is subject to withholding to the extent it is from U.S. sources. Under some treaties, the rate is reduced only if the foreign parent corporation is subject to tax on the dividends in the foreign country or only if the subsidiary corporation's dividend and interest income does not exceed a certain percentage of its total income. The percentage of stock ownership that the parent must have in the subsidiary corporation for the dividends to qualify for the reduced rate also may vary from treaty to treaty. Consent dividends. If the U.S. subsidiary receives a Form 972 from a foreign parent corporation, which agrees to treat the amount as a taxable dividend, the subsidiary must pay and report on Form 1042 and Form 1042-S any withholding tax it would have withheld if the dividend had been actually paid. Dividends paid by foreign corporations (Income Code 8). Dividends paid by a foreign corporation are generally subject to withholding if 25% or more of its gross income is effectively connected (or treated as effectively connected) with a U.S. trade or business for the 3 tax years (or shorter period) before the year in which the dividends are paid. Taxes should be withheld in the same ratio that the effectively connected gross income is to the total gross income of the foreign corporation. If less than 25% of the corporation's gross income is effectively connected with a U.S. trade or business, then the dividends are not subject to withholding. The payment to a foreign corporation by a foreign corporation of a deemed dividend under section 304(a)(1) of the Internal Revenue Code is subject to withholding except to the extent it can be clearly determined to be from foreign sources. Corporation subject to branch profits tax. If a foreign corporation is subject to branch profits tax for any tax year, withholding is not required on any dividends paid by the corporation out of its earnings and profits for that tax year. Dividends may be subject to withholding if they are attributable to any earnings and profits when the branch profits tax is prohibited by a tax treaty. 30% rate. If there is no treaty provision or exemption under the Internal Revenue Code, you must withhold tax at the statutory rate of 30%. Tax treaties. Certain treaties may exempt all or a part of these dividends from U.S. withholding tax. Some treaties provide for an exemption regardless of the payee's residence or citizenship; others provide for an exemption according to the payee's status as a resident or citizen of the payer's country. A foreign corporation that pays dividends must be a qualified resident of its country of residence to be entitled to treaty benefits with respect to those dividends. You should check the specific treaty provision. Table 3 at the end of this publication provides a list of the tax treaties and, if published, the Internal Revenue Cumulative Bulletins in which they appear. Certain Gains Generally, you need not withhold tax on income from the sale in the United States of real or personal property because it is not fixed or determinable annual or periodic income. However, if a disposition of a U.S. real property interest by a foreign person is involved, see the discussion under U.S. Real Property Interest, later. Capital gains (Income Code 9). Certain gains are subject to withholding. You must withhold at 30% on the gross amount of the following items: Gains on disposal of timber, coal, or domestic iron ore with a retained economic interest, unless an election is made to treat those gains as income effectively connected with a U.S. trade or business, Gains on contingent payments received from the sale or exchange after October 4, 1966, of patents, copyrights, and similar property, Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966, and Gains from the sale or exchange of original issue discount obligations issued after March 31, 1972. You must withhold tax on the amount of the original issue discount accruing while the obligation was held by the nonresident alien individual or foreign corporation. The amount of the original issue discount accruing does not include amounts previously taken into account as discussed earlier under Interest. If you do not know the amount of the gain, you must withhold an amount necessary to assure that the tax withheld will not be less than 30% of the recognized gain. The amount to be withheld, however, must not be more than 30% of the amount payable because of the transaction. Unless you have reason to believe otherwise, you may rely upon the written statement of the person entitled to the income as to the amount of the gain. The statement, prepared according to regulations, must show the computation of the gain. Tax treaties. Many tax treaties exempt certain types of gains from U.S. income tax. The conditions for allowing the exemptions vary under each treaty. For example, under some treaties, the nonresident alien may not be present in the United States for more than a specified period for the exemption to apply. Be sure to carefully check the provision of the treaty that applies before allowing an exemption from withholding. Royalties In general, you must withhold tax on the payment of royalties from sources in the United States. However, certain types of royalties are given reduced rates or exemptions under some tax treaties. Accordingly, these different types of royalties are treated as separate categories for withholding purposes. Industrial royalties (Income Code 10). This category of income includes royalties for the use of, or the right to use, patents, trademarks, secret processes and formulas, goodwill, franchises, "know-how," and similar rights. It also may include rents for the use or lease of personal property. Under certain tax treaties, different rates may apply to royalties for information concerning industrial, commercial, and scientific know-how. Motion picture or television copyright royalties (Income Code 11). This category refers to royalties paid for the use of motion picture and television copyrights. Other royalties (e.g., copyright, recording, publishing) (Income Code 12). This category refers to the royalties paid for the use of copyrights on books, periodicals, articles, etc., except motion picture and television copyrights. Real Property Income The following rules apply to withholding on real property income of foreign payees. Real property income and natural resources royalties (Income Code 13). You must withhold tax on income from real property located in the United States and held for the production of income, unless the foreign payee elects to treat this income as effectively connected with a U.S. trade or business. If the foreign payee chooses to treat this income as effectively connected, the payee must file Form 4224 (discussed earlier). This real property income includes royalties from mines, wells, or other natural deposits, as well as ordinary rents for the use of real property. It does not include gains from disposition of U.S. real property interests. Note. Form 4224 cannot be used for payments made after 2000. See New Forms, earlier. Pensions, Annuities, and Alimony The following rules apply to withholding on pensions, annuities, and alimony of foreign payees. Use Income Code 14 (Pensions, annuities, alimony, and/or insurance premiums) when reporting these items on Form 1042-S. Pensions and annuities. Generally, you must withhold tax on the gross amount of pensions and annuities that you pay. However, most tax treaties provide that private pensions and annuities are exempt from withholding. A pension paid to a nonresident alien as a result of services performed by the alien in the United States is treated as income effectively connected with a U.S. trade or business. This income is generally subject to graduated withholding. See Publication 15-A for information on these rules. Report income tax withholding from pensions and annuities on Form 945, Annual Return of Withheld Federal Income Tax. You must furnish the recipients and the IRS with Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Each individual who receives a pension fills out Form W-4P to claim withholding allowances and to show marital status for withholding purposes. When the nonresident alien completes Form W-4P, only "Single" marital status should be checked and only one withholding allowance is allowed, unless the alien is a resident of Canada, Mexico, Japan, or South Korea, or is a U.S. national. A U.S. national is an individual who is either a citizen of American Samoa, or a Northern Mariana Islander who chose to become a U.S. national. An alien may elect not to have tax withheld on periodic pension payments or nonperiodic pension distributions other than eligible rollover distributions (defined under Rollovers in Publication 575, Pension and Annuity Income). However, if the alien makes this no withholding election for the graduated tax, the pension income is subject to the 30% (or lower treaty rate) withholding tax. In this situation, the amounts must be reported using Forms 1042 and 1042-S. No withholding. Do not withhold tax on an annuity payment to a nonresident alien if at the time of the first payment from the plan, 90% or more of the employees eligible for benefits under the plan are citizens or residents of the United States and the payment is: Because of the nonresident's personal services performed outside the United States, or Because of personal services by a nonresident individual present in the United States for 90 days or less during each tax year, whose pay for those services does not exceed $3,000, for: A nonresident alien individual, foreign partnership, or foreign corporation not engaged in a trade or business in the United States, or An office or place of business of a U.S. resident or citizen which is maintained outside the United States. If the payment otherwise qualifies under these rules, but less than 90% of the employees eligible for benefits are citizens or residents of the United States, you still need not withhold tax on the payment if: The recipient is a resident of a country that gives a substantially equal exclusion to U.S. citizens and residents, or The recipient is a resident of a beneficiary developing country under the Trade Act of 1974. If you, as the withholding agent, are not the employer who established the annuity plan, the person entitled to the payments must file a statement with you for the exemption to apply. The statement must: Be filed for each tax year in which an annuity payment is made, Contain the annuity owner's name, address, and taxpayer identification number, if any, and Certify that the person entitled to the annuity is not a citizen or resident of the United States and that the annuity income is excluded from gross income under section 871(f) of the Internal Revenue Code. The statement must be dated and signed, must identify the tax year to which it relates, and must either contain, or be accompanied by, a written declaration that it is made under penalties of perjury. After 2000, you can exempt the payment from withholding if you can reliably associate the payment with a Form W-8BEN containing the taxpayer identification number of the payee. See New Forms, earlier. Alimony payments. Generally, alimony payments made by U.S. residents to nonresident aliens are taxable and subject to withholding whether the recipients are residing abroad or are temporarily present in the United States. Many tax treaties, however, provide for an exemption from withholding for alimony payments. These treaties are shown in Table 1, by a footnote reference, under Income code number 14. Alimony payments made to a nonresident alien by a U.S. ancillary administrator of a nonresident alien estate are from foreign sources and are not subject to withholding. Scholarships and Fellowship Grants A scholarship or fellowship grant (Income Code 15) paid to a nonresident alien who is temporarily present in the United States may or may not be subject to withholding. First, determine the source of the grant. If the grant is from foreign sources, no withholding is required. Source of income. Scholarships, fellowship grants, grants, prizes and awards made by domestic sources are generally treated as income from sources within the United States. However, see Activities outside the United States, next. Those made by foreign sources are treated as income from foreign sources. Activities outside the United States. Scholarships, fellowship grants, grants, targeted grants, and achievement awards received by nonresident aliens for activities conducted outside the United States are treated as foreign source income. From U.S. Sources Whether a fellowship grant from U.S. sources is subject to withholding depends on the nature of the payments and whether the recipient is a candidate for a degree. Candidate for a degree. Do not withhold on a qualified scholarship from U.S. sources granted and paid to a candidate for a degree. A qualified scholarship means any amount paid to an individual as a scholarship or fellowship grant to the extent that, in accordance with the conditions of the grant, the amount is to be used for the following expenses: Tuition and fees required for enrollment or attendance at an educational organization, and Fees, books, supplies, and equipment required for courses of instruction at the educational organization. You must withhold tax at 14% on amounts received from U.S. sources by an alien present in the United States on an "F,""J,""M," or "Q" visa that are related to the scholarship but are not for tuition and related expenses. You must withhold at 14% on additional amounts such as room, board, or incidental expenses received under the scholarship. Nondegree candidate. If the person receiving the scholarship or fellowship grant is not a candidate for a degree, and is present in the United States on an "F,""J,""M," or "Q" visa, you must withhold tax at 14% on the total amount of the grant that is from U.S. sources if the following requirements are met: The grant must be for study, training, or research at an educational organization in the United States, and The grant must be made by: A tax-exempt organization operated for charitable, religious, educational, etc. purposes, A foreign government, A federal, state, or local government agency, or An international organization, or a binational or multinational educational or cultural organization created or continued by the Mutual Educational and Cultural Exchange Act of 1961 (known as the Fulbright-Hays Act). If the grant does not meet both (1) and (2) above, you must withhold at 30% on the amount of the grant that is from U.S. sources. Reduced withholding. Nonresident alien students or grantees who receive U.S. source grants or scholarships may be entitled to reduced withholding on the taxable part of the grant or scholarship. The students or grantees must have an "F,""J,""M," or "Q" visa. Before applying the 14% withholding rate, you should allow the student or grantee to give you a Form W-4. The student or grantee must complete Form W-4 annually following the instructions given here and forward it to you, the payer of the scholarship, or your designated withholding agent. You may rely on the information on Form W-4 unless you know or have reason to know it is incorrect. The withholding agent will be liable for the tax to be withheld, and must file Form 1042 and a Form 1042-S (discussed later) for each student or grantee who files a Form W-4 with the agent. Each student or grantee who files a Form W-4 must file an annual U.S. income tax return to be allowed the exemptions and deductions claimed on that form. If the individual is in the United States during more than one tax year, he or she must attach a statement to the annual Form W-4 indicating that the individual has filed a U.S. income tax return for the previous year. If he or she has not been in the United States long enough to have to file a return, the individual must attach a statement to the W-4 saying that a timely U.S. tax return will be filed. A prorated portion of allowable personal exemptions based on the projected number of days he or she will be in this country is allowed. This is figured by multiplying the daily exemption amount ($7.65 for 2000) by the number of days the student or grantee expects to be in the United States during the year. The prorated exemption amount should be shown on line A of the Personal Allowances Worksheet that comes with Form W-4. On line B, a student or grantee who qualifies under Article 21(2) of the United States-India Income Tax Treaty can enter the standard deduction if he or she does not claim away-from-home expenses or other itemized deductions (discussed later). The standard deduction is $4,400 for single persons and $3,675 for married persons. All other nonresident aliens must enter "0." Generally, a zero (-0-) should be shown on lines C and D of the worksheet. But, an additional daily exemption amount may be allowed for the spouse and each dependent if the student or grantee is: A resident of Canada, Mexico, Japan, or South Korea, A U.S. national, or Eligible for the benefits of Article 21(2) of the United States-India Income Tax Treaty. These additional amounts should be entered on lines C and D, as appropriate. A U.S. national is an individual who is either a citizen of American Samoa, or a Northern Mariana Islander who chose to become a U.S. national. As lines E, F, and G of the worksheet do not apply to nonresident aliens subject to this procedure, there should be no entries on those lines. The nonresident alien student or grantee may deduct away-from-home expenses (meals, lodging, and transportation) on Form W-4 if he or she expects to be away from his or her tax home for 1 year or less. The amount of the claimed expenses should be the anticipated actual amount, if known. If the amount of the expenses is not known at the time the W-4 is filed with you, the current per diem allowance in effect for participants in the Career Education Program under the Federal Travel Regulations may be claimed on Form W-4. The allowable amount is $18.00 per day. The actual expenses or the per diem allowance should be shown on line A of the worksheet in addition to the personal exemption amount. The student or grantee can claim other expenses that will be deductible on Form 1040NR. These include student loan interest, certain state and local income taxes, charitable contributions, casualty losses, and moving expenses. He or she should include these anticipated amounts on line A of the worksheet. The student or grantee can also enter on line A of the worksheet, the part of the grant or scholarship that is tax exempt under the statute or a tax treaty. Lines A through D of the Personal Allowances Worksheet are added and the total should be shown on line H. The payer of the grant or scholarship must review the Form W-4 to make sure all the necessary and required information is provided. If the withholding agent knows or has reason to know that the amounts shown on the Form W-4 may be false, the withholding agent must reject the W-4 and withhold at the appropriate rate. However, if the only incorrect information is that the student or grantee's stay in the United States has extended beyond 12 months, the withholding agent may withhold under these rules, but without a deduction for away-from-home expenses. After receipt and acceptance of the Form W-4, the payer must withhold as if the grant or scholarship income were wages. The gross amount of the income is reduced by the total amount of exemptions and deductions on the Form W-4 and the withholding tax is figured on the rest. When completing Form 1042-S for the student or grantee, enter the gross scholarship or fellowship grant in column (b), enter the withholding allowance amount from line H of the Personal Allowances Worksheet of Form W-4 in column (c), and show the net of these two amounts in column (d). Pay for services rendered as an employee by an alien who also is the recipient of a scholarship or fellowship grant usually is subject to graduated withholding according to the rules discussed later in Pay Subject to Graduated Withholding. This includes taxable amounts an individual who is a candidate for a degree receives for teaching, doing research, and carrying out other part-time employment required as a condition for receiving the scholarship or fellowship grant. An exception to this requirement for alien students, teachers, and researchers can be found under Treaty Benefits, discussed earlier. Amounts of per diem for subsistence paid by the U.S. Government (directly or by contract) to a nonresident alien engaged in a training program in the United States under the Mutual Security Act of 1954 are not subject to 14% or 30% withholding. This is true even though the alien may be subject to income tax on those amounts. Other Grants, Prizes, and Awards Other grants, prizes, and awards made by domestic sources are treated as income from sources within the United States (however, see Activities outside the United States, earlier). Those made by foreign sources are treated as income from foreign sources. These provisions do not apply to salaries or other pay for services. Grant defined. The purpose of a grant must be to achieve a specific objective, produce a report or other similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or other similar capacity, skill, or talent of the grantee. A grant must also be an amount which does not qualify as a scholarship, fellowship grant or prize or award. Prizes and awards defined. Prizes and awards are amounts received as prizes primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement. An amount is a prize or award only if: The recipient was selected without any action on his or her part to enter the contest or proceeding, The recipient is not required to render substantial future services as a condition to receive the prize or award, and The prize or award is transferred by the payer to a governmental unit or tax-exempt charitable organization as designated by the recipient. Targeted grants and achievement awards. Targeted grants and achievement awards received by nonresident aliens for activities conducted outside the United States are treated as income from foreign sources. Targeted grants and achievement awards are issued by exempt organizations or by the United States (or one of its instruments or agencies), a State (or a political subdivision of a State), or the District of Columbia for an activity (or past activity in the case of an achievement award) undertaken in the public interest. Pay for Personal Services Performed This section explains the rules for withholding tax from pay for personal services. Pay for personal services is subject to withholding at either the 30% rate or graduated rates. Pay Subject to 30% Withholding You generally must withhold tax at the 30% rate on compensation you pay to a nonresident alien individual for labor or personal services performed in the United States, unless that pay is specifically exempted from withholding or subject to graduated withholding. This rule applies regardless of your place of residence, the place where the contract for service was made, or the place of payment. Pay for independent personal services (Income Code 16). Independent personal services (a term commonly used in tax treaties) are personal services performed by an independent nonresident alien contractor as contrasted with those performed by an employee. This category of pay includes payments for professional services, such as fees of an attorney, physician, or accountant made directly to the person performing the services. Pay for independent personal services is subject to withholding and reporting as follows. 30% rate. You must withhold at the statutory rate of 30% on all payments unless the alien enters into a withholding agreement or receives a final payment exemption (discussed later). The amount of pay subject to 30% withholding may be reduced by the personal exemption amount ($2,800 for 2000) if the alien gives you a properly completed Form 8233. A nonresident alien is allowed only one personal exemption. However, individuals who are residents of Canada, Mexico, Japan, or South Korea, or are U.S. nationals (defined below) are generally entitled to the same exemptions as U.S. citizens. Students and business apprentices covered by Article 21(2) of the United States-India Income Tax Treaty may claim an additional exemption for their spouse if a joint return is not filed, and if the spouse has no gross income for the year and is not the dependent of another taxpayer. They may also claim additional exemptions for children who reside with them in the United States at any time during the year, but only if the dependents are U.S. citizens or nationals or residents of the United States, Canada, or Mexico. They may not claim exemptions for dependents who are admitted to the United States on F-2, J-2, or M-2 visas. Each allowable exemption must be prorated according to the number of days during the tax year during which the alien performs services in the United States. Multiply the number of these days by $7.65 (the daily exemption amount for 2000) to figure the prorated amount. Residents of Japan and South Korea must make a further proration of their additional exemptions based on their gross income effectively connected with a U.S. trade or business. The rules for this proration are discussed in detail in Publication 519. A U.S. national is an individual who is either a citizen of American Samoa, or a Northern Mariana Islander who chose to become a U.S. national. Example 1. Hans Schmidt, who is a resident of Germany, worked (not as an employee) for a U.S. company in the United States for 100 days during 2000 before returning to his country. He earned $6,000 for the services performed (not considered wages) in the United States. Hans is married and has three dependent children. His wife did not work and had no income subject to U.S. tax. Hans is allowed $765 as a deduction against the payments for his personal services performed in the United States (100 days × $7.65). Tax is withheld at 30% on the rest of his earnings, $5,235 ($6,000 - $765). A tax of $1,570.50 was withheld from Hans' earnings (30% of $5,235). Example 2. If, in Example 1, Hans were a resident of Canada or Mexico or a national of the United States, working under contract with a domestic corporation, $3,825 (100 days × $7.65 per day for each of five exemptions) would be allowed against the payments for personal services performed in the United States. Tax would be withheld at 30% on $2,175 ($6,000 - $3,825), the rest of his earnings. A tax of $652.50 would have been withheld from Hans' earnings (30% of $2,175). Withholding agreements. Pay for personal services of a nonresident alien who is engaged during the tax year in the conduct of a U.S. trade or business may be wholly or partially exempted from withholding at the statutory rate if an agreement has been reached between the Assistant Commissioner (International) and the alien individual as to the amount of withholding required. This agreement will be effective for payments covered by the agreement that are made after the agreement is executed by all parties. The alien individual must agree to timely file an income tax return for the current tax year. Final payment exemption. The final payment of compensation for independent personal services may be wholly or partially exempt from withholding at the statutory rate. The nonresident alien must have been engaged during the tax year in the conduct of a U.S. trade or business. This exemption is available only once during an alien individual's tax year. It applies to the last payment of compensation, other than wages, for personal services rendered in the United States that the individual expects to receive from any withholding agent during the tax year. To obtain the final payment exemption, the nonresident alien, or the alien's agent, must file the forms and provide the information required by the Assistant Commissioner (International). This information includes, but is not limited to, the following items. A statement by each withholding agent from whom amounts of gross income effectively connected with the conduct of a U.S. trade or business have been received by the alien individual during the tax year. It must show the amount of income paid and the amount of tax withheld. The withholding agent must sign each statement and include a declaration that it is made under penalties of perjury. A statement by the withholding agent from whom the final payment of compensation for personal services will be received showing the amount of final payment and the amount that would be withheld if a final payment exemption is not granted. The withholding agent must sign the statement and include a declaration that it is made under penalties of perjury. A statement by the individual that he or she does not intend to receive any other amounts of gross income effectively connected with the conduct of a U.S. trade or business during the current tax year. The amount of tax that has been withheld (or paid) under any other provision of the Code or regulations for any income effectively connected with the conduct of a U.S. trade or business during the current tax year. The amount of any outstanding tax liabilities, including any interest and penalties, from the current tax year or prior tax periods. The provision of any income tax treaty under which a partial or complete exemption from withholding may be claimed, the country of the individual's residence, and a statement of sufficient facts to justify an exemption under that treaty. The alien individual must give a statement, signed and verified by a declaration that it is made under the penalties of perjury, that all the information provided is true, and that to his or her knowledge no relevant information has been omitted. If satisfied with the information provided, the Assistant Commissioner (International) will determine the amount of the alien individual's tentative income tax for the tax year on gross income effectively connected with the conduct of a U.S. trade or business. Ordinary and necessary business expenses may be taken into account if proved to the satisfaction of the Assistant Commissioner (International). The Assistant Commissioner (International) will provide the individual with a letter to you, the withholding agent, stating the amount of the final payment of compensation for personal services that is exempt from withholding, and the amount that would otherwise be withheld that may be paid to the individual due to the exemption. The amount of pay exempt from withholding cannot be more than $5,000. The alien individual must give two copies of the letter to you and must also attach a copy of the letter to his or her income tax return for the tax year for which the exemption is effective. Tax treaties. Under most tax treaties, pay for independent personal services performed in the United States is exempt from U.S. income tax only if the independent nonresident alien contractor performs the services during a period of temporary presence in the United States (usually not more than 183 days) and is a resident of the treaty country. Thus, the pay is not exempt from U.S. tax if the contractor is a U.S. resident. Independent nonresident alien contractors use Form 8233 to claim an exemption from withholding under a tax treaty. For more information, see Treaty Benefits, earlier, under Withholding Exemptions and Reductions. Often, you must withhold under the statutory rules on payments made to a treaty country resident contractor for services performed in the United States. This is because the factors on which the treaty exemption is based may not be determinable until after the close of the tax year. The treaty country resident contractor must then file a U.S. income tax return to recover any overwithheld tax and to provide the IRS with proof that he or she is entitled to a treaty exemption. Pay Subject to Graduated Withholding Salaries, wages, or any other pay for personal services (referred to collectively as wages) paid to nonresident alien employees are subject to graduated withholding in the same way as for U.S. citizens and residents if the wages are effectively connected with the conduct of a U.S. trade or business. Any wages paid to a nonresident alien individual for personal services performed as an employee for an employer are generally exempt from the 30% withholding. Also exempt from the 30% withholding is pay for personal services performed as an employee for an employer if it is effectively connected with the conduct of a U.S. trade or business and would be treated as wages subject to graduated withholding except that it is specifically excepted from wages. See Pay that is not wages, later, for examples of employment for which pay is not wages. Employer-employee relationship. For pay for personal services to qualify as wages, there must be an employer-employee relationship. Under the common law rules, every individual who performs services subject to the will and control of an employer, both as to what shall be done and how it shall be done, is an employee. It does not matter that the employer allows the employee considerable discretion and freedom of action, as long as the employer has the legal right to control both the method and the result of the services. If an employer-employee relationship exists, it does not matter what the parties call the relationship. It does not matter if the employee is called a partner, coadventurer, agent, or independent contractor. It does not matter how the pay is measured, how the individual is paid, or what the payments are called. Nor does it matter whether the individual works full- or part-time. The existence of the employer-employee relationship under the usual common law rules will be determined, in doubtful cases, by an examination of the facts of each case. Employee. An employee generally includes any individual who performs services if the relationship between the individual and the person for whom the services are performed is the legal relationship of employer and employee. This includes an individual who receives a supplemental unemployment pay benefit that is treated as wages. No distinction is made between classes of employees. Superintendents, managers, and other supervisory personnel are employees. Generally, an officer of a corporation is an employee, but a director acting in this capacity is not. An officer who does not perform any services, or only minor services, and neither receives nor is entitled to receive any pay is not considered an employee. Employer. An employer is any person or organization for whom an individual performs or has performed any service, of whatever nature, as an employee. The term "employer" includes not only individuals and organizations in a trade or business, but organizations exempt from income tax, such as religious and charitable organizations, educational institutions, clubs, social organizations, and societies. It also includes the governments of the United States, the states, Puerto Rico, and the District of Columbia, as well as their agencies, instrumentalities, and political subdivisions. Two special definitions of employer that may have considerable application to nonresident aliens are: An employer includes any person paying wages for a nonresident alien individual, foreign partnership, or foreign corporation not engaged in trade or business in the United States (including Puerto Rico as if a part of the United States), and An employer includes any person who has control of the payment of wages for services that are performed for another person who does not have that control. For example, if a trust pays wages, such as certain types of pensions, supplemental unemployment pay, or retired pay, and the person for whom the services were performed has no legal control over the payment of the wages, the trust is the employer. These special definitions have no effect upon the relationship between an alien employee and the actual employer when determining whether the pay received is considered to be wages. If an employer-employee relationship exists, the employer ordinarily must withhold the income tax from wage payments by using the percentage method or wage-bracket tables as shown in Publication 15, (Circular E). Pay that is not wages. Employment for which the pay is not considered wages (for graduated income tax withholding) includes, but is not limited to, the following items. Agricultural labor if the total cash wages paid to an individual worker during the year is less than $150 and the total paid to all workers during the year is less than $2,500. But even if the total amount paid to all workers is $2,500 or more, wages of less than $150 per year paid to a worker are not subject to income tax withholding if certain conditions are met. For these conditions, see Publication 51 (Circular A), Agricultural Employer's Tax Guide. Services of a household nature performed in or about the private home of an employer, or in or about the clubrooms or house of a local college club, fraternity, or sorority. A local college club, fraternity, or sorority does not include an alumni club or chapter and may not be operated primarily as a business enterprise. Examples of these services include those performed as a cook, janitor, housekeeper, governess, gardener, or houseparent. Certain services performed outside the course of the employer's trade or business for which cash payment is less than $50 for the calendar quarter. Services performed as an employee of a foreign government, without regard to citizenship, residence, or where services are performed. These include services performed by ambassadors, other diplomatic and consular officers and employees, and nondiplomatic representatives. They do not include services for a U.S. or Puerto Rican corporation owned by a foreign government. Services performed within or outside the United States by an employee or officer (regardless of citizenship or residence) of an international organization designated under the International Organizations Immunities Act. Services performed by a duly ordained, commissioned, or licensed minister of a church, but only if performed in the exercise of the ministry and not as an employee of the United States, a U.S. possession, or a foreign government, or any of their political subdivisions. These also include services performed by a member of a religious order in carrying out duties required by that order. Tips paid to an employee if they are paid in any medium other than cash or, if in cash, they amount to less than $20 in any calendar month in the course of employment. Services performed outside the United States. Compensation paid to a nonresident alien (other than a resident of Puerto Rico, discussed later) for services performed outside the United States is not considered wages and is not subject to graduated withholding or 30% withholding. Withholding exemptions. The amount of wages subject to graduated withholding may be reduced by the personal exemption amount ($2,800 for 2000). The personal exemptions allowed in figuring wages subject to graduated withholding are the same as those discussed earlier under Pay for independent personal services (Income Code 16), except that an employee must claim them on Form W-4. Special instructions for Form W-4. A nonresident alien subject to wage withholding must give the employer a completed Form W-4 to enable the employer to figure how much income tax to withhold. In completing the form, nonresident aliens should use the following instructions instead of the instructions on Form W-4. Check only "Single" marital status on line 3 (regardless of actual marital status). Claim only one withholding allowance on line 5, unless a resident of Canada, Mexico, Japan, or South Korea, or a U.S. national. Request that additional tax of $7.60 per week be withheld on line 6. If the pay period is two weeks, request that $15.30 be withheld instead. For other payroll periods, see the amounts in Publication 15 (Circular E). Do not claim "Exempt" withholding status on line 7. These instructions restrict a nonresident alien's filing status, generally limit the number of allowable exemptions, and require additional tax to be withheld because a nonresident alien cannot claim the standard deduction. Students and business apprentices from India. Students and business apprentices who are eligible for the benefits of Article 21(2) of the United States-India Income Tax Treaty can claim additional withholding allowances on line 5 for the standard deduction and their spouses. They can claim an additional withholding allowance for each dependent not admitted to the United States on F-2, J-2, or M-2 visas. Also, they do not have to request additional withholding on line 6. Reporting requirements for wages and withheld taxes. The employer must report the amount of wages and deposits of withheld income and social security and Medicare taxes by filing Form 941. Household employers should see Publication 926, Household Employer's Tax Guide, for information on reporting and paying employment taxes on wages paid to household employees. Form W-2. The employer must also report on Form W-2 the wages subject to withholding and withheld taxes and give copies of this form to the employee. For more information, see the instructions for these forms. Trust fund recovery penalty. If you are a person responsible for withholding, accounting for, or depositing or paying employment taxes, and willfully fail to do so, you can be held liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest. A responsible person for this purpose can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty. "Willfully" in this case means voluntarily, consciously, and intentionally. You are acting willfully if you pay other expenses of the business instead of the withholding taxes. Federal unemployment (FUTA) tax. The employer must pay federal unemployment tax and file Form 940 or 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return. Only the employer pays this tax; it is not deducted from the employee's wages. In certain cases, wages paid to students and railroad and agricultural workers are exempt from FUTA tax. For more information, see the instructions for these forms. Pay for dependent personal services (Income Code 17). Dependent personal services are personal services performed in the United States by a nonresident alien individual as an employee rather than as an independent contractor. Pay for dependent personal services is subject to withholding and reporting as follows. Graduated rates. Ordinarily, you must withhold on pay (wages) for dependent personal services using graduated rates. The nonresident alien must complete Form W-4 as discussed earlier under Special instructions for Form W-4, and you must report wages and income tax withheld on Form W-2. However, the nonresident alien may be exempt from tax or withholding of tax if any of the following four exceptions applies. Exception 1. Compensation paid for labor or personal services performed in the United States is deemed not to be income from sources within the United States and is exempt from U.S. income tax if: The labor or services are performed by a nonresident alien temporarily present in the United States for a period or periods not exceeding a total of 90 days during the tax year, The total pay does not exceed $3,000, and The pay is for labor or services performed as an employee of, or under a contract with: A nonresident alien individual, foreign partnership, or foreign corporation that is not engaged in a trade or business in the United States, or A U.S. citizen or resident individual, a domestic partnership, or a domestic corporation, if the labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by this individual, partnership, or corporation. If the total pay is more than $3,000, the entire amount is income from sources in the United States and is subject to U.S. tax. Also, compensation paid for labor or services performed in the United States by a nonresident alien in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a U.S. possession is not income from sources within the United States. However, this income will be treated as U.S. source income for purposes of the rules relating to pension, profit-sharing, and stock bonus plans, including the minimum participation rules. Amounts includible in the employee's income for the cost of group-term life insurance coverage provided by the employer and amounts received under an employer's accident and health plan will also be treated as U.S. source income. Exception 2. Compensation paid by a foreign employer to a nonresident alien for the period the alien is temporarily present in the United States on an "F,""J," or "Q" visa is exempt from U.S. income tax. For this purpose, a foreign employer means: A nonresident alien individual, foreign partnership, or foreign corporation, or An office or place of business maintained in a foreign country or in a U.S. possession by a domestic corporation, a domestic partnership, or an individual U.S. citizen or resident. To qualify for the exemption from withholding, the alien must give the employer a statement with the alien's name, address, and taxpayer identification number, certifying that: The alien is not a citizen or resident of the United States, and The income to be paid to the alien is exempt from U.S. income tax, and why the income is exempt. The statement must be dated, must identify the tax year and the income to which it applies, and must be signed by the alien including a written declaration that it is made under the penalties of perjury. After 2000, you can exempt the payment from withholding if you can reliably associate the payment with a Form W-8BEN containing the taxpayer identification number of the payee. See New Forms, earlier. Exception 3. Compensation paid to certain residents of Canada or Mexico who enter or leave the United States at frequent intervals is not subject to graduated income tax withholding or 30% withholding. These aliens must either: Perform duties in transportation services (such as a railroad, bus, truck, ferry, steamboat, aircraft, or other type) between the United States and Canada or Mexico, or Perform duties connected with an international project, relating to the construction, maintenance, or operation of a waterway, viaduct, dam, or bridge crossed by, or crossing, the boundary between the United States and Canada or the boundary between the United States and Mexico. To qualify for the exemption from withholding during a tax year, a Canadian or Mexican resident must give the employer a statement in duplicate with name, address, and identification number, and certifying that the resident: Is not a U.S. citizen or resident, Is a resident of Canada or Mexico, whichever applies, and Expects to perform the described duties during the tax year in question. The statement can be in any form, but it must be dated and signed by the employee, and must include a written declaration that it is made under penalties of perjury. Canadian and Mexican residents employed entirely within the United States. Neither the transportation service exception nor the international projects exception applies to the pay of a resident of Canada or Mexico who is employed entirely within the United States and who commutes from a home in Canada or Mexico to work in the United States. If an individual works at a fixed point or points in the United States (such as a factory, store, office, or designated area or areas), the wages for services performed as an employee for an employer are subject to graduated withholding. Exception 4. Compensation paid for services performed in Puerto Rico by a nonresident alien who is a resident of Puerto Rico for an employer (other than the United States or one of its agencies) is not subject to withholding. Compensation paid for either of the following types of services is not subject to wage withholding if the alien does not expect to be a resident of Puerto Rico during the entire tax year. Services performed outside the United States but not in Puerto Rico by a nonresident alien who is a resident of Puerto Rico for an employer other than the United States or one of its agencies, or Services performed outside the United States by a nonresident alien who is a resident of Puerto Rico, as an employee of the United States or any of its agencies. To qualify for the exemption from withholding for any tax year, the employee must give the employer a statement showing the employee's name and address and certifying that the employee: Is not a citizen or resident of the United States, and Is a resident of Puerto Rico who does not expect to be a resident for that entire tax year. The statement must be signed and dated by the employee and contain a written declaration that it is made under penalties of perjury. Tax treaties. Pay for dependent personal services under some tax treaties is exempt from U.S. income tax only if both the employer and the employee are treaty country residents and the nonresident alien employee performs the services while temporarily living in the United States (usually for not more than 183 days). Other treaties provide for exemption from U.S. tax on pay for dependent personal services if the employer is any foreign resident and the employee is a treaty country resident, and the nonresident alien employee performs the services while temporarily in the United States. See Claiming exemption from withholding under Treaty Benefits, earlier. Pay for teaching (Income Code 18). This category is given a separate income code number because most tax treaties provide at least partial exemption from withholding and from U.S. tax. Pay for teaching means payments to a nonresident alien professor, teacher, or researcher by a U.S. university or other accredited educational institution for teaching or research work at the institution. Graduated rates. Graduated withholding of income tax usually applies to all wages, salaries, and other pay for teaching and research paid by a U.S. educational institution during the period the nonresident alien is teaching or performing research at the institution. A nonresident alien temporarily in the United States as a nonimmigrant on an "F-1,""J-1,""M-1," or "Q-1" visa is not subject to social security and Medicare taxes on pay for services performed to carry out the purpose for which the alien was admitted to the United States. Social security and Medicare taxes should not be withheld or paid on this amount. However, if an alien is considered a resident alien, as discussed earlier, that pay is subject to social security and Medicare taxes even though the alien still has a nonimmigrant status. This rule also applies to FUTA (unemployment) taxes paid by the employer. Tax treaties. Under most tax treaties, pay for teaching is exempt from U.S. income tax and from withholding for a specified period of time when paid to a professor, teacher, or researcher who is a resident of the treaty country and not a citizen of the United States (see Table 2). The U.S. educational institution paying the compensation must report the amount of compensation paid each year on Form 1042-S. See Claiming exemption from withholding under Treaty Benefits, earlier. Pay during training (Income Code 19). This category refers to pay (as contrasted with remittances, allowances, or other forms of scholarships or fellowship grants--see Scholarships and Fellowship Grants, earlier) for personal services performed while a nonresident alien is temporarily in the United States as a student, trainee, or apprentice, or while acquiring technical, professional, or business experience. Graduated rates. Wages, salaries, or other compensation paid to a nonresident alien student, trainee, or apprentice for labor or personal services performed in the United States are subject to graduated withholding. A nonresident alien temporarily in the United States as a nonimmigrant on an "F-1,""J-1,""M-1," or "Q-1" visa is not subject to social security and Medicare taxes on pay for services performed to carry out the purpose for which the alien was admitted to the United States. Social security and Medicare taxes should not be withheld or paid on this amount. However, if an alien is considered a resident alien, as discussed earlier, that pay is subject to social security and Medicare taxes even though the alien still has a nonimmigrant status. This rule also applies to FUTA (unemployment) taxes paid by the employer. Any student who is enrolled and regularly attending classes at a school may be exempt from social security, Medicare, and FUTA taxes on pay for services performed for that school. See Publication 15 (Circular E). Tax treaties. Many tax treaties provide an exemption from U.S. income tax and from withholding on compensation paid to nonresident alien students or trainees during training in the United States for a limited period. See Claiming exemption from withholding under Treaty Benefits, earlier. In addition, some treaties provide an exemption from tax and withholding for compensation paid by the U.S. Government or its contractor to a nonresident alien student or trainee who is temporarily present in the United States as a participant in a program sponsored by the U.S. Government (see Table 2). However, a U.S. resident, the U.S. Government agency, or its contractor must report the amount of pay on Form 1042-S. Artists and Athletes Because many tax treaties contain a provision for pay to artists and athletes, a separate category--Earnings as an artist or athlete (Income Code 20)--is assigned these payments for withholding purposes. This category includes payments made for performances by public entertainers (such as theater, motion picture, radio, or television artists, or musicians) or athletes. Withholding rate. You must withhold tax at a 30% rate on payments to artists and athletes for services performed as independent contractors. See Pay for independent personal services, earlier, for more information. You must withhold tax at graduated rates on payments to artists and athletes for services performed as employees. See Pay for dependent personal services, earlier, for more information. However, in any situation where the nature of the relationship between the payor of the income and the artist or athlete is not ascertainable, you should withhold at a rate of 30%. See Special events and promotions, earlier, under Treaty Benefits for more information. Central withholding agreements. Nonresident alien entertainers or athletes performing or participating in athletic events in the United States may be able to enter into a withholding agreement with the IRS for reduced withholding provided certain requirements are met. Under no circumstances will a withholding agreement reduce taxes withheld to less than the alien's anticipated income tax liability. Nonresident alien entertainers or athletes requesting a central withholding agreement must provide the following information. A list of the names and addresses of the nonresident aliens to be covered by the agreement. Copies of all contracts that the aliens or their agents and representatives have entered into regarding the time period and performances or events to be covered by the agreement including, but not limited to, contracts with: Employers, agents, and promoters, Exhibition halls, Persons providing lodging, transportation, and advertising, and Accompanying personnel, such as band members or trainers. An itinerary of dates and locations of all events or performances scheduled during the period to be covered by the agreement. A proposed budget containing itemized estimates of all gross income and expenses for the period covered by the agreement, including any documents to support these estimates. The name, address, and telephone number of the person the IRS should contact if additional information or documentation is needed. The name, address, and employer identification number of the agent or agents who will be the central withholding agents for the aliens and who will enter into a contract with the IRS. A central withholding agent ordinarily receives contract payments, keeps books of account for the aliens covered by the agreement, and pays expenses (including tax liabilities) for the aliens during the period covered by the agreement. When the IRS approves the estimated budget and the designated central withholding agents, the Associate Chief Counsel (International) will prepare a withholding agreement. The agreement must be signed by each withholding agent, each nonresident alien covered by the agreement, and the Assistant Commissioner (International). Generally, each withholding agent must agree to withhold income tax from payments made to the nonresident alien; to pay over the withheld tax to the IRS on the dates and in the amounts specified in the agreement; and to have the IRS apply the payments of withheld tax to the withholding agent's Form 1042 account. Each withholding agent will have to file Form 1042 and Form 1042-S for each tax year in which income is paid to a nonresident alien covered by the withholding agreement. The IRS will credit the withheld tax payments, posted to the withholding agent's Form 1042 account, in accordance with the Form 1042-S. Each nonresident alien covered by the withholding agreement must agree to file Form 1040NR or, if he or she qualifies, Form 1040NR-EZ. A request for a central withholding agreement should be sent to the following address at least 90 days before the agreement is to take effect: District Director, International District OP:IN:D:C:C:HQ:12 950 L'Enfant Plaza South, SW Washington, DC 20024 Tax treaties. Under many tax treaties, compensation paid to public entertainers or athletes for services performed in the United States is exempt from U.S. income tax only when the services are performed during a limited period of temporary presence in the United States and the pay is within limits provided in the tax treaty that applies. Independent contractors may claim an exemption from withholding under a tax treaty by filing Form 8233. Employees may claim an exemption from withholding under a tax treaty by filing a statement with their employers. For more information, see Treaty Benefits under Withholding Exemptions and Reductions, earlier. Often, however, you will have to withhold at the statutory rates on the total payments to the entertainer or athlete. This is because the exemption may be based upon factors that cannot be determined until after the end of the year. See Special events and promotions under Treaty Benefits, earlier. Other Income For the discussion of Income Codes 24, 25, and 26, see U.S. Real Property Interest, later. For the discussion of Income Code 27, see Publicly Traded Partnerships, later. Gambling winnings (Income Code 28). Use this income code to report gambling winnings and any tax withheld on those winnings. Other income (Income Code 50). Use this category to report U.S. source fixed or determinable annual income that is not reportable under any of the other income categories. Examples of income that may be reportable under this category are commissions, insurance proceeds, patronage distributions, prizes, and racing purses. As discussed earlier under Income Subject to Withholding, every kind of fixed or determinable annual or periodic income from U.S. sources that is not effectively connected with a U.S. trade or business is subject to withholding unless the income is specifically exempt under the Code or a tax treaty. You generally must withhold at the 30% rate on this income. For more details on fixed or determinable income, including specific types of income that may be reportable under Income Code 50, see Income Subject to Withholding, earlier.

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