Caution: The exclusion does not apply to payments made to U.S. government employees or those in the military living outside the United States.
If You Pay Money to a Foreign Individual
Generally, a foreign person is subject to U.S. tax on U.S. source income received during the tax year, which is usually the calendar year. To ensure the IRS gets its share of the tax, it must be withheld by the paying entity. The rate of withholding will always depend on several factors, including what type of income and whether the recipient is a citizen of a country that has a tax treaty with the U.S.
The person or entity charged with the duty of withholding the tax is called the withholding agent, since the withholding agent may have custody or control over the transaction. The IRS can make the withholding agent personally liable for the duty of withholding the tax. And, even if the ultimate foreign recipient does file a US tax return and pays the correct tax, the withholding agent can still be penalized, charged interest or an addition to the tax for failing to withhold the taxes properly and remit them to the U.S. government.
Be Aware of Reporting Duties
More taxing authorities, not just those of the U.S., are taking these jurisdictional issues seriously for a number of reasons. The first reason is that taxes should rightfully be paid to the country in which profits are earned. But more than ever, civilized nations are taking greater care to follow money trails in order to thwart terrorism and various economic crimes, such as money-laundering schemes. For these reasons, taxpayers who transact business with foreign parties and expatriates alike should be clearly aware of their duties for reporting, filings and tax payments. If not, contact a Certified Public Accountant who is licensed in the U.S. and trained in international taxation.
Also view Ray Nowickis small business survival guide webinar:
Small & Medium Business Survival ?Guide to Effective Resource Management
Ray Nowicki is the Founding Partner of the Firm, and is a 1976 graduate from Canisius College with a Bachelor of Science degree in Accounting. With over 35 years of diverse professional experience, including local and multi-national CPA firms, Ray has helped Nowicki and Company, LLP grow to be one of the top 30 firms in Western New York. In recognition for service to small businesses, New York Governor George Pataki awarded him the Small Business Advocate of the Year Award in 2005. He serves most of the firm clients, especially in a number of specialized areas including estate planning and trusteeship, structuring new business ventures, strategic planning and workouts, and litigation support.
