Tax & Accounting Blog

NRA Withholding and Reporting on Payments to Foreign Nationals – Part 12: What if the Recipient of the Income Requested that Payment Be Made to a Third Party?

ONESOURCE, Tax Information Reporting, W-8 & W-9 Foreign Reporting, Withholding Management July 23, 2012

If a third party has been designated to receive the payment for services, whether you still have to withhold and report the income as if made to the individual who provided the services depends on the circumstances.

  • If the arrangement for the services was made with the service provider who, after the services were performed, indicated that payment should be made to his or her corporation (called assignment of income in case law), you must continue to treat the payment as if made to the service provider.
  • If the third party is merely acting as an agent of the service provider, you must withhold and report the payment as if made directly to the service provider.
  • If the facts support that the third party is the foreign employer of the service provider, you still must withhold 30 percent if you are not satisfied that the foreign employer is complying with U.S. payroll tax and income reporting rules. In this situation, you would treat the third party as the beneficial owner of the income, not the service provider.

Where the relationship between the service provider and the third party is not clear, you must withhold 30 percent on the payment and report the income in the name, Unknown Recipient. In this case, however, neither the payee nor the beneficial owner of the income will be able to apply the withheld amount to their U.S. tax obligation computed on their U.S. tax return.