Wednesday May 8, 2024
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1.8.1 Withholding Requirements
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Withholding Requirements
Section 1441 of the Internal Revenue Code requires an organization to withhold taxes on payments made to any nonresident alien. As a withholding agent, a charity making payments under an income producing planned gift contract or trust is liable for any tax required to be withheld. Withholding is required at the time the payment is made to the nonresident alien. Generally, the rate of withholding is 30% on the taxable portion of the payment. However, several countries have tax treaties with the United States that permit a lower withholding amount.
In order for the nonresident alien to benefit from the reduced withholding rate, he/she must first obtain a U.S. Tax Identification Number by filing Form W-7 with the IRS. After he/she has obtained the TIN, the nonresident alien must provide the charity with a Form W-8BEN and certify that:
- He/she is a resident of a treaty country;
- He/she is the beneficial owner of the income;
- He/she meets any limitation on benefits contained in the treaty, if applicable.
A U.S. trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. The trustee must withhold 30% of any direct or indirect distribution from a nongrantor trust. The amount subject to tax is the part of the distribution that would have been included in the nonresident alien's U.S. gross income if he/she had been taxed as a U.S. citizen or resident.
Filing and Payment Requirements
The charity is required to report payments subject to withholding on Form 1042-S and to file a tax return on Form 1042.
The amount of tax required to be withheld determines the frequency with which deposits must be made to the IRS. If at the end of a calendar year the total amount of un-deposited taxes is less than $200, the charity can pay the taxes along with the submission of Form 1042 or deposit the entire amount by March 15 of the following calendar year. If at the end of any month the total amount of un-deposited taxes is $200 or more but less than $2,000, the charity must deposit the taxes by the 15th of the following month. If the 15th day is a Saturday, Sunday, or legal holiday in the District of Columbia, the deposit may be made by the next business day. If a deposit of $2,000 or more was made during the month (except December) under the quarterly filing rule below, any end of the month balance of less than $2,000 must be carried over to the next month. If a deposit of $2,000 or more was made during December, any end of December balance of less than $2,000 should be remitted with Form 1042 by March 15 of the following year. If at the end of any quarter-monthly period the total amount of un-deposited taxes is $2,000 or more, the charity must deposit the taxes within 3 business days after the end of the quarter-monthly period. (A quarter-monthly period ends on the 7th, 15th, 22nd and last day of the month.) In figuring business days, exclude Saturdays, Sundays, and legal holidays. Publication 515.
Beginning January 1, 2011, all deposits must be made by electronic funds transfer. Electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). Failure to make a required deposit within the time prescribed will result in a penalty on the underpayment. Deposits must be made by 8 p.m. Eastern time the day before the deposit is due. If the deposit is 1 to 5 days late, the penalty is 2% of the underpayment. If 6 to 15 days late, the penalty is 5%. If 16 or more days late, the penalty is 10%. Pub. 515.
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