IRS General Rules
To receive the compensation/income payment on U.S. source income, the foreign national must already have (or obtain) a U.S. social security number or ITIN number, regardless of I‐94 entry status.
The USM Foundation requires Form W‐8BEN on file for all foreign nationals who receive a payment.
The general rule for taxation of payments to foreign nationals (except for business expense reimbursements) is to withhold 30% of all payments.
Foreign nationals do not receive a Form 1099. Form 1042‐S is used to report all income payments that are taxed, and all income payments exempted under the reasons specified below. (Reimbursements are not income and are not reported.) Form 1042 is the annual return filed with the IRS, along with the IRS copies of Form 1042‐S. The USM Foundation prepares and files the IRS Form 1042‐S by March 15th. A copy of the completed Form is provided to the foreign national.
IRS Tax Exemptions
There are three ways to exempt income payment to a foreign national from tax:
- Foreign Source Income Exempt: this is income sourced outside the U.S. There are different sourcing rules, depending upon the type of income being paid.
- Independent Personal Services are sourced to the location of the activity
- This type of income is not reported to the individual and to the IRS on Form 1042‐S.
- Exempt under Internal Revenue Code: this rule applies if the income, by its nature, is exempt by code. An example is qualified tuition payments exempt by Section 117 of IRS Code.
- Income in this category must be reported to the individual and the IRS on Form 1042‐S.
- The foreign national is responsible for knowing about and asking for treaty benefits
- To claim a tax treaty benefit, a foreign national must already have (or obtain) a U.S. social security number (SSN) or ITIN number, regardless of visa status. Prizes and awards are not addressed by tax treaties and are therefore subject to the 30% federal withholding rate.
- Form 8233 must be completed and submitted to the USM Foundation to apply for a treaty benefit. The USM Foundation reviews the 8233, and if it is compliant, we will complete the withholding agent portion and file the form with the IRS. There is a 10 business day waiting period from the date the form is mailed to the IRS, at which point the USM Foundation can approve the treaty benefit if the IRS has not denied it.
- Income exempted by a tax treaty must be reported to the individual and the IRS on Form 1042-S.