Welcome to Part II of our Non-Resident Alien Withholding blog. Today, we’ll look at the consequences of failing to withhold (or incorrectly withholding) on nonresident alien taxes.
As detailed in Part I in this series, U.S. taxpayers maintain responsibility to correctly withhold nonresident alien taxes and make deposits in a timely manner. The IRS considers both the withholding agent (generally the last U.S. person with control over an income item payable to a foreign person) and foreign recipient to be personally liable for tax due. So, if you fail to properly withhold, or withhold less than required, and the foreign person does not file a tax return and pay the amount due, the IRS can come after you to collect the outstanding tax liability.
While the possibility of being held personally responsible for another party’s tax liability is the most serious consequence of failing to withhold, the IRS may also assess penalties and interest for failing to withhold, failure to deposit funds, failure to file returns and failure to file information returns. This is a burden every company should strive to avoid.
The first step in withholding compliance is ensuring actual withholding occurs as required. The next consideration, after tax has been withheld, is to ensure compliance with all reporting and tax deposit requirements. A foreign person who received U.S.-sourced fixed or determinable annual or periodic income (“FDAP”) income should be issued a Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, for each source of income paid to them (e.g., interest, rent, wages, etc.) whether withholding was applied or not. You will complete this form, along with the accompanying 1042-T and 1042, to report sources of income paid, amount paid and tax withheld, among other required information, and remit to both the IRS and recipient.
To shore up your last bit of exposure, you must remit withheld taxes in a timely manner. Following a schedule similar to payroll tax deposit, the IRS has due dates on deposits for tax withheld on FDAP income based on the amount of required withholding.
As you can see, failing to withhold and report the proper amount of nonresident alien tax can create an enormous burden for you and your business. The Tax Warriors® at Drucker & Scaccetti are available to assist in compliance with this very confusing, and potentially costly, part of the U.S. tax code. Call on us for help.