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Non-Employee Compensation Paid to Nonresident Aliens

If you make payments of non-employee compensation to nonresident aliens you will need to withhold Federal Tax using the following rules:

U.S. source nonemployee compensation for any amount in excess of zero is reportable on Form 1042-S. Withhold at 30% or lesser tax treaty rate if applicable (See Table 2 in IRS Publication 915 ). The beneficial owner of the income will claim the benefit of the tax treaty article which deals with "Independent Personal Services", or with "Business Profits". The beneficial owner may claim the lesser tax treaty rate by filing Form 8233 with the withholding agent. The withholding agent will report the payment on Forms 1042 and 1042-S, even if the entire amount of compensation is exempt under a tax treaty.

Exceptions to Mandatory Withholding of Federal Income Tax on Nonresident Aliens:

  1. IRC section 861(a)(3) / IRC section 864(b)(1) - Wages or Nonemployee Compensation is exempt from withholding of federal income tax if all 3 of the following conditions met:

    1. The nonresident alien performing services is present in the U.S. for a total not exceeding 90 days in a taxable year;
    2. The compensation for such services does not exceed $3,000; and
    3. The nonresident alien performs the services as an employee of, or under contract with, a nonresident alien individual, a foreign corporation, or a foreign partnership not engaged in a trade or business in the U.S. or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation, or a U.S. partnership (including from within a U.S. possession).
  2. IRC section 872(b)(3) - Wages or Nonemployee Compensation exempt from withholding of federal income tax if both of the following conditions are met:

    1. The nonresident alien is present in the U.S. in F, J, M, or Q nonimmigrant status; and
    2. The compensation for services is paid by a nonresident alien individual, a foreign corporation, or a foreign partnership or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation, or a U.S. partnership (including from within a U.S. possession

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