Withholding of U.S. Taxes

UNITED STATES TAX WITHHOLDING

The United States Treasury Department and its tax collection arm, the Internal Revenue Service, enforce U.S. tax laws applicable to natural and legal persons who are outside of the ready reach of tax collection ability through a series of tax withholding procedures.  These procedures generally apply to persons who are not residents, citizens, or otherwise registered United States taxpayers pursuant to the provisions of the Internal Revenue Code.  These withholding rules also operate as a backstop tax collection mechanism with respect to non-compliant, but otherwise registered U.S. taxpayers.

The principal income tax withholding tax provisions of the United States include:

  1. A 30% withholding on the gross amounts of income or gain classified as “fixed or determinable, annual or periodic incomes.
  2. A 10% withholding on the proceeds from the sale or other disposition of interests in United States real property.
  3. A withholding tax assessed at the highest marginal income tax rate applicable to a particular person (corporate or natural (both rates being currently 35%)) applied to income that is effectively connected with a United States trade or business operated by a tax transparent entity with one or more non-United States resident partners or equity owners.
  4. Withholding on wage income paid to employees and at variable rates determined by reference to the size and frequency of payments.
  5. 28% backup withholding assessed against any natural or legal person who has not provided the payer with a valid U.S. taxpayer identification number (social security number, individual taxpayer identification number or employer identification number)
  6. Various special rate withholdings applicable to specific categories of income and income recipients.

 

Withholding taxes generally operate as stop gap tax collection measures, and taxpayers very often have the opportunity to apply for reduced or nil withholding.  Such applications range in complexity from very simple certifications of tax standing (including tax treaty qualification) provided to the income payer, to more complete disclosures of actual anticipated taxable income and accurate tax amounts which require IRS review, verification, and approval.  Absent the making of a pre payment application, excess taxes withheld can only be recovered through the filing of an income tax return under the normal self assessment procedures.

NEOITG, having many years of experience dealing with multiple withholding circumstances, is well suited to assist with explanations, applications, dispute resolution, and various compliance activities.