In order for payers (called withholding agents because of their obligation to withhold taxes) to withhold and report income payments appropriately, they must determine whether the beneficial owner of the income is a U.S. person or a foreign person. The broad definition for the term, withholding agent, includes anyone who “has control, receipt, custody, or payment of any item of income that is subject to withholding.” The beneficial owner is the person that must include the gross income on a U.S. tax return if there is a filing requirement.
Person is a tax term that includes both individuals and entities. U.S. persons are subject to U.S. tax on their worldwide income. They may provide their name, address and U.S. taxpayer identification number (TIN) on a Form W-9, which also serves as a certificate of U.S. status. If a U.S. person fails to provide a U.S. TIN for a Form 1099 reportable payment, the payment is subject to backup withholding, currently 28 percent.
Foreign persons are subject to U.S. tax only on their U.S.-source income and income effectively connected to a U.S. trade or business. They may provide a Form W-8BEN, which serves both as a certificate of foreign status and evidence that they are not subject to backup withholding (important if they are being paid foreign-source income not subject to U.S. tax). Their non-wage U.S.-source income payments are subject to 30 percent withholding tax (called NRA withholding), unless an exception applies, assuming the payee provides a valid withholding certificate supporting the exemption from withholding prior to payment. Income and taxes withheld (if any) must be reported on a Form 1042-S information return, even if the payment is exempt from withholding (except taxable wage income), and withholding must be reported on a Form W-2.