The federal withholding and reporting rules for payments for personal services made to foreign nationals depend on the recipient’s federal tax residency status – resident alien or nonresident alien.
Compensation payments to resident aliens are subject to the same rules for withholding and reporting as are such payments to U.S.citizens. These payments are not subject to withholding generally. However, if the recipient failed to provide you with a U.S. taxpayer identification number (TIN) or the IRS notified your organization that the recipient is subject to backup withholding, you must backup withhold, currently at 28 percent. If the total payment equals or exceeds $600 in the tax year or the amount was subject to backup withholding (or both), you must report the amount and taxes withheld, if any, on Form 1099-MISC, box 7. Payers who withheld and reported taxes must also submit a Form 945 tax return.
If the recipient is a nonresident alien and the compensation payment is U.S. source income, you must withhold 30 percent (called NRA withholding) unless an exception applies. In order to exempt a payment from withholding, the payment must meet the specific conditions for the exception and the recipient must provide any paperwork required for the exception prior to the payment. The payment and taxes withheld, if any, must be reported on a Form 1042-S under Income Code 16 unless the compensation is for a performing artist or athlete. The Income Code for compensation paid to a performer is either 42 (compensation not covered by a Central Withholding Agreement [CWA]) or 43 (compensation covered by a CWA). Payers who submit one or more Forms 1042-S must also submit a Form 1042 tax return even if none of the payments were subject to withholding.
If your organization is a withholding agent and failed to withhold the proper tax, the organization will be liable for the underwithheld tax plus penalties and interest. There are penalties that apply for failure to report the income as well.