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:
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:
IRC section 872(b)(3) - Wages or Nonemployee Compensation exempt from withholding of federal income tax if both of the following conditions are met: