Withholding on Specific Income This section discusses the specific types of income that aresubject to withholding. This discussion is organized using the sameincome types and codes used on Form 1042-S (discussed later),and in most cases on Tables 1 and 2 found at the end ofthis publication. You must withhold tax at the statutory rates shown in Chart Bunless a reduced rate or exemption under a tax treaty applies. ForU.S. source gross income that is not effectively connected with a U.S.trade or business, the rate is usually 30%. Generally, you mustwithhold the tax at the time you pay the income to the nonresidentalien individual, foreign partnership, or foreign corporation.However, a domestic partnership must withhold the tax on a foreignpartner's distributive share of income, even if it has not beendistributed. See Partnership distributions, underIncome Subject to Withholding, earlier. Interest Interest paid to foreign payees is generally subject towithholding. A substitute interest payment made to the transferor of a securityin a securities lending transaction or a sale-repurchase transactionis treated the same as the interest on the transferred security. Interest paid by U.S. obligors--general(Income Code 1). With specific exceptions, such as portfoliointerest, you must withhold on interest paid or credited on bonds,debentures, notes, open account indebtedness, governmentalobligations, or other evidences of indebtedness of U.S. obligors(other than those specifically described later under Income Codes 2,3, and 4). It also includes unstated interest on certain deferredpayment arrangements as provided in Internal Revenue Code section 483.U.S. obligors include the U.S. Government or its agencies orinstrumentalities and any U.S. resident. If, in a sale of a corporation's property, payment of the bonds orother obligations of the corporation is assumed by the buyer, thatbuyer, whether an individual, partnership, or corporation, must deductand withhold the taxes that would be required to be withheld by theselling corporation as if there had been no sale or transfer. Also, ifinterest coupons are in default, the tax must be withheld on the grossamount of interest whether or not the payment is a return of capitalor the payment of income. Claims for refund may be filed. A resident alien individual paying interest on a margin accountmaintained with a nonresident foreign brokerage firm must withholdfrom the interest whether the interest is paid directly orconstructively. A foreign tax-exempt organization may claim exemption fromwithholding of tax on bond interest coupons presented for payment inthe United States, but will be subject to withholding for any tax yearin which the organization is a private foundation. Interest on bonds of a U.S. corporation paid to a foreigncorporation not engaged in a trade or business in the United States issubject to withholding even though the interest is guaranteed by aforeign corporation that made payment outside the United States. Domestic corporations must withhold on interest credited to foreignsubsidiaries. Original issue discount.If a bond or other evidence of indebtedness is an original issuediscount obligation, the investor is subject to withholding on theoriginal issue discount (OID) accrued while the obligation was held bythe nonresident investor. However, a payment on the original issuediscount obligation is taken into account as OID only to the extentthat the discount was not previously taken into account, and only tothe extent the tax on the OID does not exceed the interest paymentless the tax on that payment. For information on the sale or exchangeof an original issue discount obligation, see Certain Gains,later. The term "original issue discount obligation" does not includeany obligations payable 183 days or less from the date of originalissue (without regard to the period held by the taxpayer). It alsodoes not include any obligation the interest on which is tax exemptunder any provision of law without regard to the identity of theholder. These provisions apply to obligations issued after March 31, 1972.Original issue discount on obligations issued before April 1, 1972, isnot subject to withholding. For more information on original issue discount, see Publication 550, Investment Income and Expenses. Interest not subject to withholding.The following types of interest of U.S. obligors paid to a foreignpayee are not subject to withholding. Interest on deposits.Interest that is not connected with a U.S. trade or business is notsubject to withholding if it is from: Deposits with persons carrying on the bankingbusiness, Deposits or withdrawable accounts with savings institutionschartered and supervised under federal or state law as savings andloan or similar associations, such as credit unions, if the interestis or would be deductible by the institutions, or Amounts left with an insurance company under an agreement topay interest on them. Deposits include certificates of deposit, open account timedeposits, Eurodollar certificates of deposit, and other depositarrangements. You may have to file Form 1042-S to report certain paymentsof interest on deposits. See Interest payments to a nonresidentalien individual who resides in Canada and is not a U.S. citizenunder Returns Required, later. Payer having income from abroad.In general, interest received from a resident alien individual or adomestic corporation is not subject to withholding if at least 80% ofthe payer's gross income from all sources has been from active foreignbusiness for the 3 tax years of the payer before the year in which theinterest is paid, or for the applicable part of those 3 years.However, limits apply if the recipient is considered to be a relatedperson. See sections 861(a) and 861(c) of the Internal Revenue Code. Bankers' acceptances.Income of a foreign central bank of issue from bankers' acceptancesis not subject to withholding. A foreign central bank of issue is abank that has by law or government sanction the main authority, otherthan the government itself, to issue instruments intended to circulateas currency. This type of bank generally is the custodian of thebanking reserves of the country under whose laws it is organized. Sales of bonds between interest dates.Do not withhold tax on accrued interest you paid in connection withthe purchase of bonds between interest dates. Income from U.S. Savings Bonds of residents of the RyukyuIslands or the Trust Territory of the Pacific Islands.Do not withhold tax on interest from a Series E, Series EE, SeriesH, or Series HH U.S. Savings Bond if the nonresident alien individualacquired the bond while a resident of the Ryukyu Islands or the TrustTerritory of the Pacific Islands. Interest on obligations of the United Statesreceived by a foreign central bank of issue or the Bank ofInternational Settlements is not subject to withholding. Portfolio interest.You need not withhold tax on portfolio interest. To qualify asportfolio interest, the interest must be otherwise subject to 30%withholding tax and must be paid on obligations issued after July 18,1984, that meet certain requirements. Original issue discount mayqualify as portfolio interest. Obligations that are not registered.Portfolio interest includes interest paid on any obligation that isnot in registered form (bearer obligations) and that isforeign-targeted. A bearer obligation is foreign-targeted if: There are arrangements to ensure that the obligations willbe sold, or resold in connection with the original issue, only to aperson who is not a United States person, Interest on the obligation is payable only outside theUnited States and its possessions, and The face of the obligation contains a statement that anyUnited States person who holds the obligation will be subject tolimits under the United States income tax laws. The interest on bearer obligations meeting these requirementsis portfolio interest. Registered obligations.Portfolio interest includes interest paid on an obligation that isin registered form, and for which the United States person (includinga foreign paying agent of an issuer who is a United States person) whowould otherwise be the withholding agent on this interest has receiveda statement that the beneficial owner of the obligation is not aUnited States person. The statement is made by the beneficial owner ofthe obligation, or a securities clearing organization, a bank, orother financial institution that holds customers' securities in theordinary course of its trade or business. If the obligation is not targeted to foreign markets, a statementmade by the beneficial owner of the obligation must meet the followingrequirements: It is signed by the beneficial owner under penalties ofperjury, It certifies that the owner is not a United States person,or if an individual, that the owner is not a citizen or a resident ofthe United States, and It provides the name and address of the beneficialowner. The statement may be made, at the option of the withholdingagent, on a Form W-8, Certificate of Foreign Status,or on a substitute form. The beneficial owner must inform thewithholding agent of any changes in the information on the statementwithin 30 days of the change. If the obligation is not targeted to foreign markets, a financialinstitution must send to the withholding agent a statement signedunder penalties of perjury by an authorized representative. It muststate that the institution has received from the beneficial owner aForm W-8 or a substitute form, or that it has received fromanother financial institution a similar statement that it, or anotherinstitution, has received a Form W-8 or a substitute form fromthe beneficial owner. The statement must provide the name and addressof the beneficial owner. A copy of the Form W-8, provided by thebeneficial owner, must be attached. The withholding agent who receives a statement must file a Form1042-S for the payment for which the statement is required forthe calendar year in which payment is made. Registered obligations targeted to foreign markets.The Form W-8 or substitute statement is not required forinterest paid on a registered obligation that is targeted to foreignmarkets if the interest is paid by a United States person to aregistered owner that is a financial institution at an address outsidethe United States. In this case, the interest is treated as portfoliointerest if the withholding agent does not have actual knowledge thatthe beneficial owner is a United States person and receives acertificate, documentary evidence, or statement from a financialinstitution or member of a clearing organization, which member is thebeneficial owner. No particular form is required for the certificate or documentaryevidence. However, see Temporary Regulation section 35a.9999-5(b), A-14, for what the certificate or documentaryevidence must contain. If the person providing the certificate has not provided a previouscertificate for an obligation, the certificate must be provided withinthe period beginning 90 days before the first interest payment date.If it is not received by the date 30 days prior to the payment, thewithholding agent may withhold tax. Thereafter, the certificate mustbe filed within the period beginning January 15 and ending on January31 of each year. For other information, see Temporary Regulationsection 35a.9999-5(b), A-15. If the withholding agent pays interest to the beneficial owner(neither a financial institution nor a member of a clearingorganization), the owner must provide the withholding agent a FormW-8 or substitute statement. However, a withholding agent thatis a foreign branch of a U. S. financial institution need not receivea Form W-8 or substitute statement if the withholding agentreceives from the beneficial owner documentary evidence that thebeneficial owner is not a United States person. See TemporaryRegulation section 35a.9999-4, A-5, for what constitutesdocumentary evidence. Documentary evidence must be provided within the period beginning90 days before the first interest payment date. The beneficial ownermust confirm the continuing validity of the documentary evidencewithin the period beginning 90 days before the first day of the thirdcalendar year following the provision of the evidence and during thesame period every three years thereafter while still the owner. A registered obligation is targeted to foreign markets if it issold (or resold in connection with its original issuance) only toforeign persons or to foreign branches of U. S. financial institutionsin accordance with procedures similar to those provided underRegulation section 1.163-5(c)(2)(i), and Temporary Regulationsection 35a.9999- 5(b), A-13. Form 1042-S does not have to be filed to report this intereston registered obligations targeted to foreign markets unless a FormW-8 or substitute statement is provided. Nonqualifying payees.Interest paid to a 10% shareholder is not portfolio interest anddoes not qualify for the exemption from withholding. For an obligationissued by a corporation, a "10% shareholder" is any person whoowns at least 10% of the total combined voting power of all classes ofvoting stock of the corporation. For an obligation issued by apartnership, a "10% shareholder" is any person who owns at least10% of the capital or profits interest in the partnership. Generally,the constructive ownership of stock rules apply in determining if aperson is a 10% shareholder of a corporation. Similar rules will applyin determining the ownership of the capital or the profits interest ina partnership. For payments to foreign corporations, portfolio interest does notinclude interest that is paid to: A bank on an extension of credit made pursuant to a loanagreement entered into in the ordinary course of its trade orbusiness, except for interest paid on an obligation of the UnitedStates, A 10% shareholder (described above), or A controlled foreign corporation from a relatedperson. Contingent interest rule.Portfolio interest generally does not include contingent interest.Contingent interest is any of the following: Interest that is determined by reference to: Any receipts, sales, or other cash flow of the debtor orrelated person, Income or profits of the debtor or related person, Any change in value of any property of the debtor or arelated person, or Any dividend, partnership distributions, or similar paymentsmade by the debtor or a related person, and Any other type of contingent interest that is identified bythe Secretary of the Treasury in regulations. The term "related person" is defined in section871(h)(4)(B) of the Internal Revenue Code. Exceptions.The contingent interest rule does not apply to any interest paid oraccrued on any indebtedness with a fixed term that was issued: By April 7, 1993, or After April 7, 1993, pursuant to a written binding contractin effect on that date and at all times thereafter before thatindebtedness was issued. Also, the contingent interest rule does not apply to interestdescribed in subparagraph (C) of section 871(h)(4). Interest on real property mortgages(Income Code 2). Because there is no reduced rate or exemptionunder some tax treaties for interest paid or credited on real propertymortgages, it is assigned a separate category for withholdingpurposes. This is interest paid on any type of debt instrument that issecured by a mortgage or deed of trust on real property located in theUnited States, regardless of whether the mortgagor (or grantor) is aU.S. citizen or a U.S. business entity. Interest paid to controlling foreign corporations(Income Code 3). Under some tax treaties, there is no reduced rateor exemption for interest paid by a U.S. corporation to a controllingforeign corporation. This is interest that is paid or credited by adomestic corporation (as contrasted with a resident foreigncorporation) on borrowings from a controlling foreign corporation. Theinterest may be on any type of debt including open or unsecuredaccounts payable, notes, certificates, bonds, or other evidences ofindebtedness. A controlling foreign corporation is a corporation ofthe treaty country that controls, directly or indirectly, more than50% of the entire voting power of the paying corporation. Interest paid by foreign corporations(Income Code 4). If a foreign corporation is engaged in a U.S.trade or business, any interest paid by the foreign corporation'strade or business in the United States is subject to withholding as ifpaid by a domestic corporation. 30% rate.If there is no treaty provision or exemption under the Code, youmust withhold tax at the statutory rate of 30% on the interest paid bya foreign corporation's U.S. trade or business. Tax treaties.In general, recipients of interest from a U.S. trade or business ofa foreign corporation are entitled to reduced rates of, or exemptionfrom, tax under a treaty in the same manner and subject to the sameconditions as if they had received the interest from a domesticcorporation. However, a foreign corporation that receives interestpaid by a U.S. trade or business of a foreign corporation must also bea qualified resident of its country of residence to be entitled tobenefits under that country's tax treaty. Alternatively, a recipient may be entitled to treaty benefits underthe payor's treaty if there is a provision in that treaty that appliesspecifically to interest paid by foreign corporations. This provisionmay exempt all or a part of this interest. Some treaties provide foran exemption regardless of the payee's residence or citizenship;others provide for an exemption according to the payee's status as aresident or citizen of the payor's country. A foreign corporation that pays interest must be a qualifiedresident of its country of residence for the recipient to be entitledto treaty benefits with respect to that interest. You should check the specific treaty provision. Table 3at the end of this publication provides a list of the taxtreaties and, if published, the Internal Revenue Cumulative Bulletinsin which they appear. Interest on tax-free covenant bonds(Income Code 5). Different withholding rates apply to interest onbonds and other obligations issued before 1934 that contain a tax-freecovenant. A tax-free covenant is an agreement of the obligor to pay orreimburse any part of the bondholder's income tax on the interest.Interest on tax-free covenant bonds issued after 1933 is subject tothe general withholding provisions and rates just discussed in theother interest categories. Withholding rates.The statutory withholding rates for tax-free covenant bond intereston bonds issued before 1934 are: 2% on tax-free covenant bond interest on bonds issued beforeJanuary 1, 1934, whose maturity date was not extended on or after thatdate, unless paragraph (2) applies to that interest, 30% on tax-free covenant bond interest on bonds issuedbefore January 1, 1934, whose maturity date was not extended on orafter that date if the interest is paid to a nonresident alienindividual, nonresident partnership made up entirely or partly ofnonresident aliens, a nonresident foreign corporation, or an owner whois unknown to the withholding agent, and the tax liability assumed bythe obligor is not more than 2% of the interest, and 27 1/2% on tax-free covenant bond interest onbonds issued before January 1, 1934, whose maturity date was extendedon or after that date and the tax liability assumed by the obligor ismore than 27 1/2% of the interest. Tax treaties.Under most tax treaties, the tax rates for interest on tax-freecovenant bonds issued before 1934 are the same as those shown at theend of this publication in Table 1 in the column for IncomeCode 1. But be sure to check the specific treaty provision. Use thetreaty rate only if it is less than the statutory rate. Dividends The following types of dividends paid to foreign payees aregenerally subject to withholding. A substitute dividend payment made to the transferor of a securityin a securities lending transaction or a sale-repurchase transactionis treated the same as a distribution on the transferred security. Dividends paid by U.S. corporations -- general(Income Code 6). This category includes all distributions ofdomestic corporations (other than dividends paid by a U.S. subsidiarycorporation to a foreign parent corporation--Income Code 7). Subject to certain exceptions, you must withhold tax on the grossamount of all corporate distributions paid to nonresident payees, tothe extent treated as gross income from sources within the UnitedStates. Do not withhold tax on a nontaxable distribution payable in stockor stock rights, or a distribution that is treated as a distributionin part or full payment in exchange for stock. If part of thedistribution is taxable, you must withhold on the entire distribution. You must withhold tax on a domestic corporation's cash distributionmade on its stock in the ordinary course of its business to foreignshareholders. You must withhold even though it may be later determinedthat part or all of the distribution is a return of capital or a gainfrom the sale or exchange of property. Capital gain dividendspaid by a regulated investment company or real estate investmenttrust generally are not subject to withholding. However, capital gaindividends paid by a real estate investment trust are subject towithholding at a 35% rate as discussed later under U.S. RealProperty Interest. Dividends paid to a shareholder whose status is not definite.If the shareholder's address is in the United States, you mayassume that the shareholder is a citizen or resident of the UnitedStates or a domestic partnership or corporation. In that case, youneed not withhold tax. Unless the facts and circumstances indicateclearly that the shareholder is a nonresident alien, foreignpartnership, or foreign corporation, an address in care of anotherperson in the United States does not of itself warrant treating theshareholder as a nonresident alien, foreign partnership, or foreigncorporation. However, if you do not definitely know the status of a shareholder,you must withhold the tax if the shareholder's address is outside theUnited States. If a shareholder changes from an address outside theUnited States to an address in the United States, you must withholdthe tax unless you receive proof showing that the individual is acitizen or resident of the United States. (A shareholder may claimU.S. citizenship or residence by filing a statement or Form 1078, asdiscussed earlier under Withholding Exemptions andReductions.) Dividends paid by a domestic corporation (an "80/20"company).Generally, a percentage of any dividend paid by a domesticcorporation that received at least 80% of its gross income from anactive foreign business for the testing period (the 3 tax years beforethe year in which the dividends are declared, or shorter period if thecorporation was not in existence for 3 years) is not subject towithholding. The percentage is found by dividing the corporation'sforeign gross income for the testing period by the corporation's totalgross income for that period. Main business in Puerto Rico or the Virgin Islands.Dividends paid by a domestic corporation that generally conductsits main business activities in Puerto Rico or the Virgin Islands andthat has chosen the Puerto Rico economic activity credit or thepossession tax credit are not subject to withholding. Jointly-owned stock.If stock is owned jointly by a nonresident alien individual and theU.S. citizen spouse of that individual, you must withhold tax only onthe amount of the dividends considered paid to the nonresident alien. Consent dividends.If the corporation receives a Form 972, Consent of ShareholderTo Include Specific Amount in Gross Income, from a nonresidentalien or other foreign shareholder who agrees to treat the amount as ataxable dividend, the corporation must pay and report on Form 1042 andForm 1042-S any withholding tax it would have withheld if thedividend had been actually paid. Dividends paid by U.S. subsidiaries to foreign parentcorporations(Income Code 7). Under certain tax treaties, there are reducedwithholding rates for dividends from a U.S. subsidiary corporation toa foreign parent corporation. Accordingly, these dividends are aseparate category for purposes of correctly applying the withholdingrules. The payment to a foreign corporation of a deemed dividend underCode section 304(a)(1) is subject to withholding to the extent it isfrom U.S. sources. Under some treaties, the rate is reduced only if the foreign parentcorporation is subject to tax on the dividends in the foreign countryor only if the subsidiary corporation's dividend and interest incomedoes not exceed a certain percentage of its total income. Thepercentage of stock ownership that the parent must have in thesubsidiary corporation for the dividends to qualify for the reducedrate also may vary from treaty to treaty. Consent dividends.If the U.S. subsidiary receives a Form 972 from a foreign parentcorporation, which agrees to treat the amount as a taxable dividend,the subsidiary must pay and report on Form 1042 and Form 1042-Sany withholding tax it would have withheld if the dividend had beenactually paid. Dividends paid by foreign corporations(Income Code 8). Dividends paid by a foreign corporation aregenerally subject to withholding if 25% or more of its gross income iseffectively connected (or treated as effectively connected) with aU.S. trade or business for the 3 tax years (or shorter period) beforethe year in which the dividends are paid. Taxes should be withheld inthe same ratio that the effectively connected gross income is to thetotal gross income of the foreign corporation. If less than 25% of thecorporation's gross income is effectively connected with a U.S. tradeor business, then the dividends are not subject to withholding. The payment to a foreign corporation by a foreign corporation of adeemed dividend under Code section 304(a)(1) is subject to withholdingexcept to the extent it can be clearly determined to be from foreignsources. Corporation subject to branch profits tax.If a foreign corporation is subject to branch profits tax for anytax year, withholding is not required on any dividends paid by thecorporation out of its earnings and profits for that tax year. Dividends may be subject to withholding if they are attributable toany earnings and profits when the branch profits tax is prohibited bya tax treaty. 30% rate.If there is no treaty provision or exemption under the InternalRevenue Code, you must withhold tax at the statutory rate of 30%. Tax treaties.Certain treaties may exempt all or a part of these dividends fromU.S. withholding tax. Some treaties provide for an exemptionregardless of the payee's residence or citizenship; others provide foran exemption according to the payee's status as a resident or citizenof the payer's country. A foreign corporation that pays dividends must be a qualifiedresident of its country of residence to be entitled to treaty benefitswith respect to those dividends. You should check the specific treaty provision. Table 3at the end of this publication provides a list of the taxtreaties and, if published, the Internal Revenue Cumulative Bulletinsin which they appear. Certain Gains Generally, you need not withhold tax on income from the sale in theUnited States of real or personal property because it is not fixed ordeterminable annual or periodic income. However, if a disposition of aU.S. real property interest by a foreign person is involved, see thediscussion under U.S. Real Property Interest, later. Capital gains(Income Code 9). Certain gains are subject to withholding. You mustwithhold at 30% on the gross amount of the following items: Gains on disposal of timber, coal, or domestic iron ore witha retained economic interest, unless an election is made to treatthose gains as income effectively connected with a U.S. trade orbusiness, Gains on contingent payments received from the sale orexchange after October 4, 1966, of patents, copyrights, and similarproperty, Gains on certain transfers of all substantial rights to, oran undivided interest in, patents if the transfers were made beforeOctober 5, 1966, and Gains from the sale or exchange of original issue discountobligations issued after March 31, 1972. You must withhold tax on theamount of the original issue discount accruing while the obligationwas held by the nonresident alien individual or foreign corporation.The amount of the original issue discount accruing does not includeamounts previously taken into account as discussed earlier underInterest. If you do not know the amount of the gain, you must withhold anamount necessary to assure that the tax withheld will not be less than30% of the recognized gain. The amount to be withheld, however, mustnot be more than 30% of the amount payable because of the transaction. Unless you have reason to believe otherwise, you may rely upon thewritten statement of the person entitled to the income as to theamount of the gain. The statement, prepared according to regulations,must show the computation of the gain and must be given to you induplicate. You must forward the duplicate copy of the statement alongwith Form 1042 that you file with the IRS. Tax treaties.Many tax treaties exempt certain types of gains from U.S. incometax. The conditions for allowing the exemptions vary under eachtreaty. For example, under some treaties, the nonresident alien maynot be present in the United States for more than a specified periodfor the exemption to apply. Be sure to carefully check the provisionof the treaty that applies before allowing an exemption fromwithholding. Royalties In general, you must withhold tax on the payment of royalties fromsources in the United States. However, certain types of royalties aregiven reduced rates or exemptions under some tax treaties.Accordingly, these different types of royalties are treated asseparate categories for withholding purposes. Industrial royalties(Income Code 10). This category of income includes royalties forthe use of, or the right to use, patents, trademarks, secret processesand formulas, goodwill, franchises, "know-how," and similarrights. It also may include rents for the use or lease of personalproperty. Under certain tax treaties, different rates may apply toroyalties for information concerning industrial, commercial, andscientific know-how. Motion picture or television copyright royalties(Income Code 11). This category refers to royalties paid for theuse of motion picture and television copyrights. Other royalties (e.g., copyright, recording, publishing)(Income Code 12). This category refers to the royalties paid forthe use of copyrights on books, periodicals, articles, etc., exceptmotion picture and television copyrights. Real Property Income The following rules apply to withholding on real property income offoreign payees. Real property income and natural resources royalties(Income Code 13). You must withhold tax on income from realproperty located in the United States and held for the production ofincome, unless the foreign payee elects to treat this income aseffectively connected with a U.S. trade or business. If the foreignpayee chooses to treat this income as effectively connected, the payeemust file Form 4224 (discussed earlier). This real property incomeincludes royalties from mines, wells, or other natural deposits, aswell as ordinary rents for the use of real property. It does notinclude gains from disposition of U.S. real property interests. Pensions, Annuities,and Alimony The following rules apply to withholding on pensions, annuities,and alimony of foreign payees. Use Income Code 14 (Pensions,annuities, alimony, and/or insurance premiums) when reportingthese items on Form 1042-S. Pensions and annuities.Generally, you must withhold tax on the gross amount of pensionsand annuities that you pay. However, most tax treaties provide thatprivate pensions and annuities are exempt from withholding. A pension paid to a nonresident alien as a result of servicesperformed by the alien in the United States is treated as incomeeffectively connected with a U.S. trade or business. This income isgenerally subject to graduated withholding. See Publication 15-Afor information on these rules. Report income tax withholding from pensions and annuities on Form945, Annual Return of Withheld Federal Income Tax. You mustfurnish the recipients and the IRS with Form 1099-R,Distributions from Pensions, Annuities, Retirement orProfit-Sharing Plans, IRAs, Insurance Contracts, etc. Each individual who receives a pension fills out Form W-4P toclaim withholding allowances and to show marital status forwithholding purposes. When the nonresident alien completes FormW-4P, only "Single" marital status should be checked andonly one withholding allowance is allowed, unless the alien is aresident of Canada, Mexico, Japan, or South Korea, or is a U.S.national. A U.S. national is an individual who is either a citizen ofAmerican Samoa, or a Northern Mariana Islander who chose to become aU.S. national. An alien may elect not to have tax withheld on periodic pensionpayments or nonperiodic pension distributions other than eligiblerollover distributions (defined under Rollovers inPublication 575, Pension and Annuity Income). However, ifthe alien makes this no withholding election for the graduated tax,the pension income is subject to the 30% (or lower treaty rate)withholding tax. In this situation, the amounts must be reported usingForms 1042 and 1042-S. No withholding.Do not withhold tax on an annuity payment to a nonresident alien ifat the time of the first payment from the plan, 90% or more of theemployees eligible for benefits under the plan are citizens orresidents of the United States and the payment is: Because of the nonresident's personal services performedoutside the United States, or Because of personal services by a nonresident individualpresent in the United States for 90 days or less during each tax year,whose pay for those services does not exceed $3,000, for: A nonresident alien individual, foreign partnership, orforeign corporation not engaged in a trade or business in the UnitedStates, or An office or place of business of a U.S. resident or citizenwhich is maintained outside the United States. If the payment otherwise qualifies under these rules, but less than90% of the employees eligible for benefits are citizens or residentsof the United States, you still need not withhold tax on the paymentif: The recipient is a resident of a country that gives asubstantially equal exclusion to U.S. citizens and residents,or The recipient is a resident of a beneficiary developingcountry under the Trade Act of 1974. If you, as the withholding agent, are not the employer whoestablished the annuity plan, the person entitled to the payments mustfile a statement with you for the exemption to apply. The statementmust: Be filed for each tax year in which an annuity payment ismade, Contain the annuity owner's name, address, and taxpayeridentification number, if any, and Certify that the person entitled to the annuity is not acitizen or resident of the United States and that the annuity incomeis excluded from gross income under Internal Revenue Code section871(f). The statement must be dated and signed, must identify the tax yearto which it relates, and must either contain, or be accompanied by, awritten declaration that it is made under penalties of perjury. Alimony payments.Generally, alimony payments made by U.S. residents to nonresidentaliens are taxable and subject to withholding whether the recipientsare residing abroad or are temporarily present in the United States. Many tax treaties, however, provide for an exemption fromwithholding for alimony payments. These treaties are shown inTable 1, by a footnote reference, under Income codenumber 14. Alimony payments made to a nonresident alien by a U.S. ancillaryadministrator of a nonresident alien estate are from foreign sourcesand are not subject to withholding. Scholarships and Fellowship Grants A scholarship or fellowship grant (Income Code 15) paid to anonresident alien who is temporarily present in the United States mayor may not be subject to withholding. First, determine the source ofthe grant. If the grant is from foreign sources, no withholding isrequired. Source of income.Scholarships, fellowship grants, grants, prizes and awards made bydomestic sources are generally treated as income from sources withinthe United States. However, see Activities outside the UnitedStates, next. Those made by foreign sources are treated asincome from foreign sources. Activities outside the United States.Scholarships, fellowship grants, grants, targeted grants, andachievement awards received by nonresident aliens for activitiesconducted outside the United States are treated as foreign sourceincome. From U.S. Sources Whether a fellowship grant from U.S. sources is subject towithholding depends on the nature of the payments and whether therecipient is a candidate for a degree. Candidate for a degree.Do not withhold on a qualified scholarship from U.S.sources granted and paid to a candidate for a degree. A qualifiedscholarship means any amount paid to an individual as a scholarship orfellowship grant to the extent that, in accordance with the conditionsof the grant, the amount is to be used for the following expenses: Tuition and fees required for enrollment or attendance at aneducational organization, and Fees, books, supplies, and equipment required for courses ofinstruction at the educational organization. You must withhold tax at 14% on amounts received from U.S. sourcesby an alien present in the United States on an "F,""J,""M,"or "Q" visa that are related to the scholarship but are not fortuition and related expenses. You must withhold at 14% on additionalamounts such as room, board, or incidental expenses received under thescholarship. Nondegree candidate.If the person receiving the scholarship or fellowship grant is nota candidate for a degree, and is present in the United States on an"F,""J,""M," or "Q" visa, you must withhold tax at14% on the total amount of the grant that is from U.S. sources if thefollowing requirements are met: The grant must be for study, training, or research at aneducational organization in the United States, and The grant must be made by: A tax-exempt organization operated for charitable,religious, educational, etc. purposes, A foreign government, A federal, state, or local government agency, or An international organization, or a binational ormultinational educational or cultural organization created orcontinued by the Mutual Educational and Cultural Exchange Act of 1961(known as the Fulbright-Hays Act). If the grant does not meet both (1) and (2) above, you mustwithhold at 30% on the amount of the grant that is from U.S. sources. Reduced withholding.Nonresident alien students or grantees who receive U.S. sourcegrants or scholarships may be entitled to reduced withholding on thetaxable part of the grant or scholarship. The students or granteesmust have an "F,""J,""M," or "Q" visa. Before applying the 14% withholding rate, you should allow thestudent or grantee to give you a Form W-4. The student orgrantee must complete Form W-4 annually following theinstructions given here and forward it to you, the payer of thescholarship, or your designated withholding agent. You may rely on theinformation on Form W-4 unless you know or have reason to knowit is incorrect. The withholding agent will be liable for the tax tobe withheld, and must file Form 1042 and a Form 1042-S(discussed later) for each student or grantee who files a FormW-4 with the agent. Each student or grantee who files a Form W-4 must file anannual U.S. income tax return to be allowed the exemptions anddeductions claimed on that form. If the individual is in the UnitedStates during more than one tax year, he or she must attach astatement to the annual Form W-4 indicating that the individualhas filed a U.S. income tax return for the previous year. If he or shehas not been in the United States long enough to have to file areturn, the individual must attach a statement to the W-4 sayingthat a timely U.S. tax return will be filed. A prorated portion of allowable personal exemptions based on theprojected number of days he or she will be in this country is allowed.This is figured by multiplying the daily exemption amount ($7.53 for1999) by the number of days the student or grantee expects to be inthe United States during the year. The prorated exemption amountshould be shown on line A of the Personal Allowances Worksheetthat comes with Form W-4. On Line B, a student or grantee who qualifies under Article 21(2)of the United States-India Income Tax Treaty can enter thestandard deduction if he or she does not claim away-from-home expensesor other itemized deductions (discussed later). The standard deductionis $4,300 for single persons and $3,600 for married persons. All othernonresident aliens must enter "0." Generally, a zero (-0-) should be shown on lines C and D of theworksheet. But, an additional daily exemption amount may be allowedfor the spouse and each dependent if the student or grantee is: A resident of Canada, Mexico, Japan, or South Korea, A U.S. national, or Eligible for the benefits of Article 21(2) of the UnitedStates-India Income Tax Treaty. These additional amounts should be entered on lines C and D, asappropriate. A U.S. national is an individual who is either a citizenof American Samoa, or a Northern Mariana Islander who chose to becomea U.S. national. As lines E and F of the worksheet do not apply to nonresidentaliens subject to this procedure, there should be no entries on thoselines. The nonresident alien student or grantee may deduct away-from-homeexpenses (meals, lodging, and transportation) on Form W-4 if heor she expects to be away from his or her tax home for 1 year or less.The amount of the claimed expenses should be the anticipated actualamount, if known. If the amount of the expenses is not known at thetime the W-4 is filed with you, the current per diem allowancein effect for participants in the Career Education Program under theFederal Travel Regulations may be claimed on Form W-4. Theallowable amount is $18.00 per day. The actual expenses or the per diem allowance should be shown online A of the worksheet in addition to the personal exemption amount. The student or grantee can claim other expenses that will bedeductible on Form 1040NR. These include student loan interest,certain state and local income taxes, charitable contributions,casualty losses, and moving expenses. He or she should include theseanticipated amounts on line A of the worksheet. The student or grantee can also enter on line A of the worksheet,the part of the grant or scholarship that is tax exempt under thestatute or a tax treaty. Lines A through D of the Personal Allowances Worksheetare added and the total should be shown on line H. The payer of the grant or scholarship must review the FormW-4 to make sure all the necessary and required information isprovided. If the withholding agent knows or has reason to know thatthe amounts shown on the Form W-4 may be false, the withholdingagent must reject the W-4 and withhold at the appropriate rate.However, if the only incorrect information is that the student orgrantee's stay in the United States has extended beyond 12 months, thewithholding agent may withhold under these rules, but without adeduction for away-from-home expenses. After receipt and acceptance of the Form W-4, the payer mustwithhold as if the grant or scholarship income were wages. The grossamount of the income is reduced by the total amount of exemptions anddeductions on the Form W-4 and the withholding tax is figured onthe rest. When completing Form 1042-S for the student or grantee, enterthe gross scholarship or fellowship grant in column (b), enter thewithholding allowance amount from line H of the PersonalAllowances Worksheet of Form W-4 in column (c), and showthe net of these two amounts in column (d). Pay for services renderedas an employee by an alien who also is the recipient of ascholarship or fellowship grant usually is subject to graduatedwithholding according to the rules discussed later in Pay Subjectto Graduated Withholding. This includes taxable amounts anindividual who is a candidate for a degree receives for teaching,doing research, and carrying out other part-time employment requiredas a condition for receiving the scholarship or fellowship grant. Anexception to this requirement for alien students, teachers, andresearchers can be found under Treaty Benefits, discussedearlier. Amounts of per diem for subsistencepaid by the U.S. Government (directly or by contract) to anonresident alien engaged in a training program in the United Statesunder the Mutual Security Act of 1954 are not subject to 14% or 30%withholding. This is true even though the alien may be subject toincome tax on those amounts. Other Grants,Prizes, and Awards Other grants, prizes, and awards made by domestic sources aretreated as income from sources within the United States (however, seeActivities outside the United States, earlier). Those madeby foreign sources are treated as income from foreign sources. Theseprovisions do not apply to salaries or other pay for services. Grant defined.The purpose of a grant must be to achieve a specific objective,produce a report or other similar product, or improve or enhance aliterary, artistic, musical, scientific, teaching, or other similarcapacity, skill, or talent of the grantee. A grant must also be anamount which does not qualify as a scholarship, fellowship grant orprize or award. Prizes and awards defined.Prizes and awards are amounts received as prizes primarily inrecognition of religious, charitable, scientific, educational,artistic, literary, or civic achievement. An amount is a prize oraward only if: The recipient was selected without any action on his or herpart to enter the contest or proceeding, The recipient is not required to render substantial futureservices as a condition to receive the prize or award, and The prize or award is transferred by the payer to agovernmental unit or tax-exempt charitable organization as designatedby the recipient. Targeted grants and achievement awards.Targeted grants and achievement awards received by nonresidentaliens for activities conducted outside the United States are treatedas income from foreign sources. Targeted grants and achievement awardsare issued by exempt organizations or by the United States (or one ofits instruments or agencies), a State (or a political subdivision of aState), or the District of Columbia for an activity (or past activityin the case of an achievement award) undertaken in the publicinterest. Pay for Personal Services Performed This section explains the rules for withholding tax from pay forpersonal services. Pay for personal services is subject to withholdingat either the 30% rate or graduated rates. Pay Subject to30% Withholding You generally must withhold tax at the 30% rate on compensation youpay to a nonresident alien individual for labor or personal servicesperformed in the United States, unless that pay is specificallyexempted from withholding or subject to graduated withholding. Thisrule applies regardless of your place of residence, the place wherethe contract for service was made, or the place of payment. Pay for independent personal services(Income Code 16). Independent personal services (a term commonlyused in tax treaties) are personal services performed by anindependent nonresident alien contractor as contrasted with thoseperformed by an employee. This category of pay includes payments forprofessional services, such as fees of an attorney, physician, oraccountant made directly to the person performing the services. Pay for independent personal services is subject to withholding andreporting as follows. 30% rate.You must withhold at the statutory rate of 30% on all paymentsunless the alien enters into a withholding agreement or receives afinal payment exemption (discussed later). The amount of pay subject to 30% withholding may be reduced by thepersonal exemption amount ($2,750 for 1999) if the alien gives you aproperly completed Form 8233. A nonresident alien is allowed only onepersonal exemption. However, individuals who are residents of Canada,Mexico, Japan, or South Korea, or are U.S. nationals (defined below)are generally entitled to the same exemptions as U.S. citizens. Students and business apprentices covered by Article 21(2) of theUnited States-India Income Tax Treaty may claim an additionalexemption for their spouse if a joint return is not filed, and if thespouse has no gross income for the year and is not the dependent ofanother taxpayer. They may also claim additional exemptions forchildren who reside with them in the United States at any time duringthe year, but only if the dependents are U.S. citizens or nationals orresidents of the United States, Canada, or Mexico. They may not claimexemptions for dependents who are admitted to the United States onF-2, J-2, or M-2 visas. Each allowable exemption must be prorated according to the numberof days during the tax year during which the alien performs servicesin the United States. Multiply the number of these days by $7.53 (thedaily exemption amount for 1999) to figure the prorated amount.Residents of Japan and South Korea must make a further proration oftheir additional exemptions based on their gross income effectivelyconnected with a U.S. trade or business. The rules for this prorationare discussed in detail in Publication 519. A U.S. national is an individual who is either a citizenof American Samoa, or a Northern Mariana Islander who chose to becomea U.S. national. Example 1.Hans Schmidt, who is a resident of Germany, worked (not as anemployee) for a U.S. company in the United States for 100 days during1999 before returning to his country. He earned $6,000 for theservices performed (not considered wages) in the United States. Hansis married and has three dependent children. His wife did not work andhad no income subject to U.S. tax. Hans is allowed $753 as a deductionagainst the payments for his personal services performed in the UnitedStates (100 days $7.53). Tax is withheld at 30% on the rest ofhis earnings, $5,247 ($6,000 - $753). A tax of $1,574.10 waswithheld from Hans' earnings (30% of $5,247). Example 2.If, in Example 1, Hans were a resident of Canada or Mexico or anational of the United States, working under contract with a domesticcorporation, $3,765 (100 days $7.53 per day for each of fiveexemptions) would be allowed against the payments for personalservices performed in the United States. Tax would be withheld at 30%on $2,235 ($6,000 - $3,765), the rest of his earnings. A tax of$670.50 would have been withheld from Hans' earnings (30% of $2,235). Withholding agreements.Pay for personal services of a nonresident alien who is engagedduring the tax year in the conduct of a U.S. trade or business may bewholly or partially exempted from withholding at the statutory rate ifan agreement has been reached between the Assistant Commissioner(International) and the alien individual as to the amount ofwithholding required. This agreement will be effective for paymentscovered by the agreement that are made after the agreement is executedby all parties. The alien individual must agree to timely file anincome tax return for the current tax year. Final payment exemption.The final payment of compensation for independent personal servicesmay be wholly or partially exempt from withholding at the statutoryrate. The nonresident alien must have been engaged during the tax yearin the conduct of a U.S. trade or business. This exemption isavailable only once during an alien individual's tax year. It appliesto the last payment of compensation, other than wages, for personalservices rendered in the United States that the individual expects toreceive from any withholding agent during the tax year. To obtain the final payment exemption, the nonresident alien, orthe alien's agent, must file the forms and provide the informationrequired by the Assistant Commissioner (International). Thisinformation includes, but is not limited to, the following items. A statement by each withholding agent from whom amounts ofgross income effectively connected with the conduct of a U.S. trade orbusiness have been received by the alien individual during the taxyear. It must show the amount of income paid and the amount of taxwithheld. The withholding agent must sign each statement and include adeclaration that it is made under penalties of perjury. A statement by the withholding agent from whom the finalpayment of compensation for personal services will be received showingthe amount of final payment and the amount that would be withheld if afinal payment exemption is not granted. The withholding agent mustsign the statement and include a declaration that it is made underpenalties of perjury. A statement by the individual that he or she does not intendto receive any other amounts of gross income effectively connectedwith the conduct of a U.S. trade or business during the current taxyear. The amount of tax that has been withheld (or paid) under anyother provision of the Code or regulations for any income effectivelyconnected with the conduct of a U.S. trade or business during thecurrent tax year. The amount of any outstanding tax liabilities, including anyinterest and penalties, from the current tax year or prior taxperiods. The provision of any income tax treaty under which a partialor complete exemption from withholding may be claimed, the country ofthe individual's residence, and a statement of sufficient facts tojustify an exemption under that treaty. The alien individual must give a statement, signed and verifiedby a declaration that it is made under the penalties of perjury, thatall the information provided is true, and that to his or her knowledgeno relevant information has been omitted. If satisfied with the information provided, the AssistantCommissioner (International) will determine the amount of the alienindividual's tentative income tax for the tax year on gross incomeeffectively connected with the conduct of a U.S. trade or business.Ordinary and necessary business expenses may be taken into account ifproved to the satisfaction of the Assistant Commissioner(International). The Assistant Commissioner (International) will provide theindividual with a letter to you, the withholding agent, stating theamount of the final payment of compensation for personal services thatis exempt from withholding, and the amount that would otherwise bewithheld that may be paid to the individual due to the exemption. Theamount of pay exempt from withholding cannot be more than $5,000. Thealien individual must give two copies of the letter to you and mustalso attach a copy of the letter to his or her income tax return forthe tax year for which the exemption is effective. Tax treaties.Under most tax treaties, pay for independent personal servicesperformed in the United States is exempt from U.S. income tax only ifthe independent nonresident alien contractor performs the servicesduring a period of temporary presence in the United States (usuallynot more than 183 days) and is a resident of the treaty country. Thus,the pay is not exempt from U.S. tax if the contractor is a U.S.resident. Independent nonresident alien contractors use Form 8233 to claim anexemption from withholding under a tax treaty. For more information,see Treaty Benefits, earlier, under WithholdingExemptions and Reductions. Often, you must withhold under the statutory rules on payments madeto a treaty country resident contractor for services performed in theUnited States. This is because the factors on which the treatyexemption is based may not be determinable until after the close ofthe tax year. The treaty country resident contractor must then file aU.S. income tax return to recover any overwithheld tax and to providethe IRS with proof that he or she is entitled to a treaty exemption. Pay Subject toGraduated Withholding Salaries, wages, or any other pay for personal services (referredto collectively as wages) paid to nonresident alien employees aresubject to graduated withholding in the same way as for U.S. citizensand residents if the wages are effectively connected with the conductof a U.S. trade or business. Any wages paid to a nonresident alienindividual for personal services performed as an employee for anemployer are generally exempt from the 30% withholding. Also exempt from the 30% withholding is pay for personal servicesperformed as an employee for an employer if it is effectivelyconnected with the conduct of a U.S. trade or business and would betreated as wages subject to graduated withholding except that it isspecifically excepted from wages. See Pay that is not wages,later for examples of employment for which pay is not wages. Employer-employee relationship.For pay for personal services to qualify as wages, there must be anemployer-employee relationship. Under the common law rules, every individual who performs servicessubject to the will and control of an employer, both as to what shallbe done and how it shall be done, is an employee. It does not matterthat the employer allows the employee considerable discretion andfreedom of action, as long as the employer has the legal right tocontrol both the method and the result of the services. If an employer-employee relationship exists, it does not matterwhat the parties call the relationship. It does not matter if theemployee is called a partner, coadventurer, agent, or independentcontractor. It does not matter how the pay is measured, how theindividual is paid, or what the payments are called. Nor does itmatter whether the individual works full- or part-time. The existence of the employer-employee relationship under the usualcommon law rules will be determined, in doubtful cases, by anexamination of the facts of each case. Employee.An employee generally includes any individual who performs servicesif the relationship between the individual and the person for whom theservices are performed is the legal relationship of employer andemployee. This includes an individual who receives a supplementalunemployment pay benefit that is treated as wages. No distinction is made between classes of employees.Superintendents, managers, and other supervisory personnel areemployees. Generally, an officer of a corporation is an employee, buta director acting in this capacity is not. An officer who does notperform any services, or only minor services, and neither receives noris entitled to receive any pay is not considered an employee. Employer.An employer is any person or organization for whom an individualperforms or has performed any service, of whatever nature, as anemployee. The term "employer" includes not only individuals andorganizations in a trade or business, but organizations exempt fromincome tax, such as religious and charitable organizations,educational institutions, clubs, social organizations, and societies.It also includes the governments of the United States, the states,Puerto Rico, and the District of Columbia, as well as their agencies,instrumentalities, and political subdivisions. Two special definitions of employer that may have considerableapplication to nonresident aliens are: An employer includes any person paying wages for anonresident alien individual, foreign partnership, or foreigncorporation not engaged in trade or business in the United States(including Puerto Rico as if a part of the United States), and An employer includes any person who has control of thepayment of wages for services that are performed for another personwho does not have that control. For example, if a trust pays wages, such as certain types ofpensions, supplemental unemployment pay, or retired pay, and theperson for whom the services were performed has no legal control overthe payment of the wages, the trust is the employer. These special definitions have no effect upon the relationshipbetween an alien employee and the actual employer when determiningwhether the pay received is considered to be wages. If an employer-employee relationship exists,the employer ordinarily must withhold the income tax from wagepayments by using the percentage method or wage-bracket tables asshown in Publication 15, Circular E. Pay that is not wages.Employment for which the pay is not considered wages (for graduatedincome tax withholding) includes, but is not limited to, the followingitems. Agricultural labor if the total cash wages paid to anindividual worker during the year is less than $150 and the total paidto all workers during the year is less than $2,500. But even if thetotal amount paid to all workers is $2,500 or more, wages of less than$150 per year paid to a worker are not subject to income taxwithholding if certain conditions are met. For these conditions, seePublication 51, Circular A, Agricultural Employer's Tax Guide. Services of a household nature performed in or about theprivate home of an employer, or in or about the clubrooms or house ofa local college club, fraternity, or sorority. A local college club,fraternity, or sorority does not include an alumni club or chapter andmay not be operated primarily as a business enterprise. Examples ofthese services include those performed as a cook, janitor,housekeeper, governess, gardener, or houseparent. Certain services performed outside the course ofthe employer's trade or business for which cash payment is less than$50 for the calendar quarter. Services performed as an employee of a foreign government,without regard to citizenship, residence, or where services areperformed. These include services performed by ambassadors, otherdiplomatic and consular officers and employees, and nondiplomaticrepresentatives. They do not include services for a U.S. or PuertoRican corporation owned by a foreign government. Services performed within or outside the United States by anemployee or officer (regardless of citizenship or residence) of aninternational organization designated under the InternationalOrganizations Immunities Act. Services performed by a duly ordained, commissioned, orlicensed minister of a church, but only if performed in the exerciseof the ministry and not as an employee of the United States, a U.S.possession, or a foreign government, or any of their politicalsubdivisions. These also include services performed by a member of areligious order in carrying out duties required by that order. Tips paid to an employee if they are paid in any mediumother than cash or, if in cash, they amount to less than $20 in anycalendar month in the course of employment. Services performed outside the United States.Compensation paid to a nonresident alien (other than a resident ofPuerto Rico, discussed later) for services performed outside theUnited States is not considered wages and is not subject to graduatedwithholding or 30% withholding. Withholding exemptions.The amount of wages subject to graduated withholding may be reducedby the personal exemption amount ($2,750 for 1999). The personalexemptions allowed in figuring wages subject to graduated withholdingare the same as those discussed earlier under Pay for independentpersonal services (Income Code 16), except that an employee mustclaim them on Form W-4. Special instructions for Form W-4.A nonresident alien subject to wage withholding must give theemployer a completed Form W-4 to enable the employer to figurehow much income tax to withhold. In completing the form, nonresidentaliens should use the following instructions instead of theinstructions on Form W-4. Check only "Single" marital status on line 3(regardless of actual marital status). Claim only one withholding allowance on line 5, unless aresident of Canada, Mexico, Japan, or South Korea, or a U.S.national. Request that additional tax of $4.00 per week be withheld online 6. If the pay period is two weeks, request that $8.00 be withheldinstead. Do not claim "Exempt" withholding status on line7. These instructions restrict a nonresident alien's filingstatus, generally limit the number of allowable exemptions, andrequire additional tax to be withheld because a nonresident aliencannot claim the standard deduction. Students and business apprentices from India.Students and business apprentices who are eligible for the benefitsof Article 21(2) of the United States-India Income Tax Treatycan claim additional withholding allowances on line 5 for the standarddeduction and their spouses. They can claim an additional withholdingallowance for each dependent not admitted to the United States on F-2,J-2, or M-2 visas. Also, they do not have to request additionalwithholding on line 6. Reporting requirements for wages and withheld taxes.The employer must report the amount of wages and deposits ofwithheld income and social security and Medicare taxes by filing Form941. Household employers should see Publication 926, HouseholdEmployer's Tax Guide for information on reporting and payingemployment taxes on wages paid to household employees. Form W-2.The employer must also report on Form W-2 the wages subjectto withholding and withheld taxes and give copies of this form to theemployee. For more information, see the instructions for these forms. Trust fund recovery penalty.If you are a person responsible for withholding, accounting for, ordepositing or paying employment taxes, and willfully fail to do so,you can be held liable for a penalty equal to the full amount of theunpaid trust fund tax, plus interest. A responsible person for thispurpose can be an officer of a corporation, a partner, a soleproprietor, or an employee of any form of business. A trustee or agentwith authority over the funds of the business can also be heldresponsible for the penalty. "Willfully" in this case means voluntarily, consciously, andintentionally. You are acting willfully if you pay other expenses ofthe business instead of the withholding taxes. Federal unemployment (FUTA) tax.The employer must pay federal unemployment tax and file Form 940 or940-EZ, Employer's Annual Federal Unemployment (FUTA) TaxReturn. Only the employer pays this tax; it is not deducted fromthe employee's wages. In certain cases, wages paid to students andrailroad and agricultural workers are exempt from FUTA tax. For moreinformation, see the instructions for these forms. Pay for dependent personal services(Income Code 17). Dependent personal services are personal servicesperformed in the United States by a nonresident alien individual as anemployee rather than as an independent contractor. Pay for dependent personal services is subject to withholding andreporting as follows. Graduated rates.Ordinarily, you must withhold on pay (wages) for dependent personalservices using graduated rates. The nonresident alien must completeForm W-4 as discussed earlier, under Special instructionsfor Form W-4, and you must report wages and income taxwithheld on Form W-2. However, the nonresident alien may beexempt from tax or withholding of tax if any of the following fourexceptions applies. Exception 1.Compensation paid for labor or personal services performed in theUnited States is deemed not to be income from sources within theUnited States and is exempt from U.S. income tax if: The labor or services are performed by a nonresident alientemporarily present in the United States for a period or periods notexceeding a total of 90 days during the tax year, The total pay does not exceed $3,000, and The pay is for labor or services performed as an employeeof, or under a contract with: A nonresident alien individual, foreign partnership, orforeign corporation that is not engaged in a trade or business in theUnited States, or A U.S. citizen or resident individual, a domesticpartnership, or a domestic corporation, if the labor or services areperformed for an office or place of business maintained in a foreigncountry or in a possession of the United States by this individual,partnership, or corporation. If the total pay is more than $3,000, the entire amount is incomefrom sources in the United States and is subject to U.S. tax. Also, compensation paid for labor or services performed in theUnited States by a nonresident alien in connection with theindividual's temporary presence in the United States as a regularmember of the crew of a foreign vessel engaged in transportationbetween the United States and a foreign country or a U.S. possessionis not income from sources within the United States. However, thisincome will be treated as U.S. source income for purposes of the rulesrelating to pension, profit-sharing, and stock bonus plans, includingthe minimum participation rules. Amounts includible in the employee'sincome for the cost of group-term life insurance coverage provided bythe employer and amounts received under an employer's accident andhealth plan will also be treated as U.S. source income. Exception 2.Compensation paid by a foreign employer to a nonresident alien forthe period the alien is temporarily present in the United States on an"F,""J,""M," or "Q" visa is exempt from U.S.income tax. For this purpose, a foreign employer means: A nonresident alien individual, foreign partnership, orforeign corporation, or An office or place of business maintained in a foreigncountry or in a U.S. possession by a domestic corporation, a domesticpartnership, or an individual U.S. citizen or resident. To qualify for the exemption from withholding, the alien must givethe employer a statement with the alien's name, address, and taxpayeridentification number, certifying that: The alien is not a citizen or resident of the United States,and The income to be paid to the alien is exempt from U.S.income tax, and why the income is exempt. The statement must be dated, must identify the tax year and theincome to which it applies, and must be signed by the alien includinga written declaration that it is made under the penalties of perjury. Exception 3.Compensation paid to certain residents of Canada or Mexico whoenter or leave the United States at frequent intervals is not subjectto graduated income tax withholding or 30% withholding. These aliensmust either: Perform duties in transportation services (such as arailroad, bus, truck, ferry, steamboat, aircraft, or other type)between the United States and Canada or Mexico, or Perform duties connected with an international project,relating to the construction, maintenance, or operation of a waterway,viaduct, dam, or bridge crossed by, or crossing, the boundary betweenthe United States and Canada or the boundary between the United Statesand Mexico. To qualify for the exemption from withholding during a tax year, aCanadian or Mexican resident must give the employer a statement induplicate with name, address, and identification number, andcertifying that the resident: Is not a U.S. citizen or resident, Is a resident of Canada or Mexico, whichever applies,and Expects to perform the described duties during the tax yearin question. The statement can be in any form, but it must be dated and signedby the employee, and must include a written declaration that it ismade under penalties of perjury. Canadian and Mexican residents employed entirely within theUnited States.Neither the transportation service exception nor the internationalprojects exception applies to the pay of a resident of Canada orMexico who is employed entirely within the United States and whocommutes from a home in Canada or Mexico to work in the United States.If an individual works at a fixed point or points in the United States(such as a factory, store, office, or designated area or areas), thewages for services performed as an employee for an employer aresubject to graduated withholding. Exception 4.Compensation paid for services performed in Puerto Rico by anonresident alien who is a resident of Puerto Rico for an employer(other than the United States or one of its agencies) is not subjectto withholding. Compensation paid for either of the following types of services isnot subject to wage withholding if the alien does not expect to be aresident of Puerto Rico during the entire tax year. Services performed outside the United States but not inPuerto Rico by a nonresident alien who is a resident of Puerto Ricofor an employer other than the United States or one of its agencies,or Services performed outside the United States by anonresident alien who is a resident of Puerto Rico, as an employee ofthe United States or any of its agencies. To qualify for the exemption from withholding for any tax year, theemployee must give the employer a statement showing the employee'sname and address and certifying that the employee: Is not a citizen or resident of the United States,and Is a resident of Puerto Rico who does not expect to be aresident for that entire tax year. The statement must be signed and dated by the employee andcontain a written declaration that it is made under penalties ofperjury. Tax treaties.Pay for dependent personal services under some tax treaties isexempt from U.S. income tax only if both the employer and the employeeare treaty country residents and the nonresident alien employeeperforms the services while temporarily living in the United States(usually for not more than 183 days). Other treaties provide forexemption from U.S. tax on pay for dependent personal services if theemployer is any foreign resident and the employee is a treaty countryresident, and the nonresident alien employee performs the serviceswhile temporarily in the United States. See Claiming exemptionfrom withholding, discussed earlier under Treaty Benefits. Pay for teaching(Income Code 18). This category is given a separate income codenumber because most tax treaties provide at least partial exemptionfrom withholding and from U.S. tax. Pay for teaching means payments toa nonresident alien professor, teacher, or researcher by a U.S.university or other accredited educational institution for teaching orresearch work at the institution. Graduated rates.Graduated withholding of income tax usually applies to all wages,salaries, and other pay for teaching and research paid by a U.S.educational institution during the period the nonresident alien isteaching or performing research at the institution. A nonresident alien temporarily in the United States as anonimmigrant on an "F-1,""J-1,""M-1," or "Q-1"visa is not subject to social security and Medicare taxes on pay forservices performed to carry out the purpose for which the alien wasadmitted to the United States. Social security and Medicare taxesshould not be withheld or paid on this amount. However, if an alien isconsidered a resident alien, as discussed earlier, that pay is subjectto social security and Medicare taxes even though the alien still hasa nonimmigrant status. This rule also applies to FUTA (unemployment)taxes paid by the employer. Tax treaties.Under most tax treaties, pay for teaching is exempt from U.S.income tax and from withholding for a specified period of time whenpaid to a professor, teacher, or researcher who is a resident of thetreaty country and not a citizen of the United States (see Table2). The U.S. educational institution paying the compensationmust report the amount of compensation paid each year on Form1042-S. See Claiming exemption from withholding,discussed earlier under Treaty Benefits. Pay during training(Income Code 19). This category refers to pay (as contrasted withremittances, allowances, or other forms of scholarships or fellowshipgrants--see Scholarships and Fellowship Grants,earlier) for personal services performed while a nonresidentalien is temporarily in the United States as a student, trainee, orapprentice, or while acquiring technical, professional, or businessexperience. Graduated rates.Wages, salaries, or other compensation paid to a nonresident alienstudent, trainee, or apprentice for labor or personal servicesperformed in the United States are subject to graduated withholding. A nonresident alien temporarily in the United States as anonimmigrant on an "F-1,""J-1,""M-1," or "Q-1"visa is not subject to social security and Medicare taxes on pay forservices performed to carry out the purpose for which the alien wasadmitted to the United States. Social security and Medicare taxesshould not be withheld or paid on this amount. However, if an alien isconsidered a resident alien, as discussed earlier, that pay is subjectto social security and Medicare taxes even though the alien still hasa nonimmigrant status. This rule also applies to FUTA (unemployment)taxes paid by the employer. Any student who is enrolled and regularly attending classes at aschool may be exempt from social security, Medicare, and FUTA taxes onpay for services performed for that school. See Publication 15. Tax treaties.Many tax treaties provide an exemption from U.S. income tax andfrom withholding on compensation paid to nonresident alien students ortrainees during training in the United States for a limited period.See Claiming exemption from withholding, discussed earlierunder Treaty Benefits. In addition, some treaties providean exemption from tax and withholding for compensation paid by theU.S. Government or its contractor to a nonresident alien student ortrainee who is temporarily present in the United States as aparticipant in a program sponsored by the U.S. Government (seeTable 2). However, a U.S. resident, the U.S. Governmentagency, or its contractor must report the amount of pay on Form1042-S. Artists and Athletes Because many tax treaties contain a provision for pay to artistsand athletes, a separate category--Earnings as an artist orathlete (Income Code 20)--is assigned these payments forwithholding purposes. This category includes payments made forperformances by public entertainers (such as theater, motion picture,radio, or television artists, or musicians) or athletes. Withholding rate.You must withhold tax at a 30% rate on payments to artists andathletes for services performed as independent contractors. SeePay for independent personal services, earlier, for moreinformation. You must withhold tax at graduated rates on payments toartists and athletes for services performed as employees. See Payfor dependent personal services, earlier, for more information.However, in any situation where the nature of the relationship betweenthe payor of the income and the artist or athlete is notascertainable, you should withhold at a rate of 30%. See Specialevents and promotions, earlier, under Treaty Benefitsfor more information. Central withholding agreements.Nonresident alien entertainers or athletes performing orparticipating in athletic events in the United States may be able toenter into a withholding agreement with the IRS for reducedwithholding provided certain requirements are met. Under nocircumstances will a withholding agreement reduce taxes withheld toless than the alien's anticipated income tax liability. Nonresident alien entertainers or athletes requesting a centralwithholding agreement must provide the following information. A list of the names and addresses of the nonresident aliensto be covered by the agreement. Copies of all contracts that the aliens or their agents andrepresentatives have entered into regarding the time period andperformances or events to be covered by the agreement including, butnot limited to, contracts with: Employers, agents, and promoters, Exhibition halls, Persons providing lodging, transportation, and advertising,and Accompanying personnel, such as band members ortrainers. An itinerary of dates and locations of all events orperformances scheduled during the period to be covered by theagreement. A proposed budget containing itemized estimates of all grossincome and expenses for the period covered by the agreement, includingany documents to support these estimates. The name, address, and telephone number of the person theIRS should contact if additional information or documentation isneeded. The name, address, and employer identification number of theagent or agents who will be the central withholding agents for thealiens and who will enter into a contract with the IRS. A centralwithholding agent ordinarily receives contract payments, keeps booksof account for the aliens covered by the agreement, and pays expenses(including tax liabilities) for the aliens during the period coveredby the agreement. When the IRS approves the estimated budget and the designatedcentral withholding agents, the Associate Chief Counsel(International) will prepare a withholding agreement. The agreementmust be signed by each withholding agent, each nonresident aliencovered by the agreement, and the Assistant Commissioner(International). Generally, each withholding agent must agree to withhold income taxfrom payments made to the nonresident alien; to pay over the withheldtax to the IRS on the dates and in the amounts specified in theagreement; and to have the IRS apply the payments of withheld tax tothe withholding agent's Form 1042 account. Each withholding agent willhave to file Form 1042 and Form 1042-S for each tax year inwhich income is paid to a nonresident alien covered by the withholdingagreement. The IRS will credit the withheld tax payments, posted tothe withholding agent's Form 1042 account, in accordance with the Form1042-S. Each nonresident alien covered by the withholdingagreement must agree to file Form 1040NR or, if he or she qualifies,Form 1040NR-EZ. A request for a central withholding agreement should be sent to thefollowing address at least 90 days before the agreement is to takeeffect: Internal Revenue Service Chief, Technical Services CP:IN:D:C:C:SS:TS Room 4417 950 L'Enfant Plaza South, SW Washington, DC 20024 Tax treaties.Under many tax treaties, compensation paid to public entertainersor athletes for services performed in the United States is exempt fromU.S. income tax only when the services are performed during a limitedperiod of temporary presence in the United States and the pay iswithin limits provided in the tax treaty that applies. Independent contractors may claim an exemption from withholdingunder a tax treaty by filing Form 8233. Employees may claim anexemption from withholding under a tax treaty by filing a statementwith their employers. For more information, see Treaty Benefits,discussed earlier under Withholding Exemptions andReductions. Often, however, you will have to withhold at the statutory rates onthe total payments to the entertainer or athlete. This is because theexemption may be based upon factors that cannot be determined untilafter the end of the year. See Special events and promotions,earlier, under Treaty Benefits. Other Income For the discussion of Income Codes 24, 25, and 26, see U.S.Real Property Interest, later. For the discussion of Income Code27, see Publicly Traded Partnerships, later. Gambling winnings(Income Code 28). Use this income code to report gambling winningsand any tax withheld on those winnings. Other income(Income Code 50). Use this category to report U.S. source fixed ordeterminable annual income that is not reportable under any of theother income categories. Examples of income that may be reportableunder this category are commissions, insurance proceeds, patronagedistributions, prizes, and racing purses. As discussed earlier under Income Subject to Withholding,every kind of fixed or determinable annual or periodic income fromU.S. sources that is not effectively connected with a U.S. trade orbusiness is subject to withholding unless the income is specificallyexempt under the Code or a tax treaty. You generally must withhold atthe 30% rate on this income. For more details on fixed or determinableincome, including specific types of income that may be reportableunder Income Code 50, see Income Subject to Withholding,earlier.