You send a U.S. company an invoice for $10,000. Seven thousand dollars arrives. Nobody made a mistake. The payer kept $3,000 and sent it to the IRS, because the law told the payer to.
That is NRA withholding. NRA stands for nonresident alien. The rule is that certain payments of U.S. source income to a foreign person get cut by 30 percent at the moment they are paid, before the money leaves the United States, and before you have filed anything or agreed to anything.
Two things make this rule different from the rest of the tax code. The first is that it is not collected from you. It is collected from the person paying you, who is legally on the hook for it. The second is that whether it applies to you at all depends on which side of the U.S. person line you fall on.
What the rule actually requires
The rule lives in IRC section 1441. Section 1442 does the same job for foreign corporations, and section 1443 for foreign tax-exempt organizations. The IRS calls all three together "NRA withholding."
Section 1441(a) says that all persons "having the control, receipt, custody, disposal, or payment" of the listed items of income "shall deduct and withhold from such items a tax equal to 30 percent thereof."
Read the list of people that sentence covers. It is not the recipient. It is anyone who touches the money on the way out.
The 30 percent is taken on the gross payment. The law says to withhold 30 percent of the item, not 30 percent of your profit. If you invoiced $10,000 and spent $2,000 earning it, the withholding is still $3,000, not $2,400. Expenses do not enter into it at this stage.
What income is covered. Section 1441(b) names interest, dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and "other fixed or determinable annual or periodical gains, profits, and income." That last phrase is where the shorthand FDAP income comes from. Subsection (b) also reaches gains described in section 631(b) or (c) and amounts and gains taxed under section 871(a)(1)(C) and (D). Section 1441(a) sets a reduced rate of 14 percent for the items in the second sentence of subsection (b), which are qualified scholarship and fellowship grants paid to nonresident aliens present in the United States on F, J, M or Q visas.
What is not covered, and the trap inside that question. Section 1441(c)(1) removes withholding for income that is effectively connected with a U.S. trade or business. The exception is narrower than it looks. It is written for "any item of income (other than compensation for personal services)" that is effectively connected. Effectively connected pay for personal services is not taken out by that sentence. Wages sit in a third place: subsection (b) lists "salaries, wages" as a covered item, and section 1441(c)(4) lets the Secretary exempt compensation for personal services by regulation, which is why an employee's U.S. wages generally run through the ordinary graduated wage withholding rules instead of this regime. The short version is that "it is effectively connected income, so nobody withholds" is not a safe assumption when the payment is for your services.
Three nearby regimes are genuinely separate, and the IRS says so on its NRA withholding page. NRA withholding "does not include withholding done under section 1445" (dispositions of U.S. real property interests, known as FIRPTA), "or under section 1446" (a foreign partner's share of effectively connected income), "or withholding under section 1446(f) on disposition of certain partnership interests."
Who has to do it. The IRS defines a withholding agent as "a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding." And then it says the part that explains everything else on this page: "As a withholding agent, you are personally liable for any tax required to be withheld. This liability is independent of the tax liability of the foreign person to whom the payment is made."
That is why your U.S. client, or Stripe, or a stock broker, will not simply take your word for who you are. If they get it wrong, the IRS comes to them for the money, not to you. So they withhold 30 percent by default and wait for a form.
The form that changes the rate. A lower rate or an exemption can come from the code itself or from a tax treaty between the United States and your country. You claim it on Form W-8BEN, and you give that form to the payer, not to the IRS. The IRS instruction is direct: "Give Form W-8 BEN to the withholding agent or payer if you are a foreign person and you are the beneficial owner of an amount subject to withholding."
What gets reported. The payer files Form 1042 (the annual withholding return) and issues you a Form 1042-S showing what you were paid and what was withheld. Form 1042-T is the transmittal that goes with the 1042-S copies. Note that a 1042-S is not a 1099. They are different forms for different people.
Where the income comes from matters as much as who you are. For services, the IRS rule is that "the place, where the personal services are performed, generally determines the source of the personal service income, regardless of where the contract was made, or the place of payment, or the residence of the payer." A U.S. client, paying U.S. dollars, into a U.S. bank, does not by itself make the income U.S. source.
🇺🇸 If the IRS counts you as a U.S. person
This regime is not about you. NRA withholding is defined as withholding on payments to foreign persons. Nobody is going to take 30 percent out of your invoice under section 1441.
What you do instead:
- You give the payer Form W-9 with your taxpayer identification number. You get paid in full, and the payment is reported on a 1099.
- There is a separate trap with a similar shape. It is called backup withholding, and the current rate is 24 percent. It applies when you fail to give the payer a correct TIN, or when the IRS tells the payer to withhold because you failed to report or underreported interest and dividend income. It is not the 30 percent rule. Different statute, different rate, different form.
Now the part that actually costs U.S. founders money.
When you pay a foreign person, you become the withholding agent. You hire a designer in Argentina. You pay a royalty to a foreign software author. Your LLC makes a distribution to a foreign investor. In each case you are the one with "control, receipt, custody, disposal, or payment" of the money, and you are personally liable for the tax you should have withheld and did not.
So before you pay a foreign person, you collect a W-8BEN, you work out whether the payment is U.S. source and whether it is FDAP, and if withholding applies, you withhold and you file Forms 1042 and 1042-S. "The contractor handles their own taxes" is not a defense, because the liability is independent of theirs.
🌏 If it does not
The regime is aimed at you. Assume 30 percent of gross is coming off unless you do something about it, and assume it happens on payment day, not at tax time.
Three questions decide what actually happens to a given payment:
- Is the income U.S. source? For services, source follows the place where the work was performed. If you write code in Seoul for a client in Austin, the services were performed outside the United States. If you fly to Austin and work there for a month, that month's work was performed inside the United States. Same client, different answer.
- Is it FDAP, or is it effectively connected income? NRA withholding is aimed at FDAP. Section 1441(c)(1) takes effectively connected income out of it, but that exception is written for income "other than compensation for personal services," so effectively connected pay for your own services is not automatically safe. Employee wages generally run through the ordinary graduated wage withholding rules instead.
- Does a treaty lower the rate? Treaties differ by country and by type of income. Interest, dividends and royalties usually have their own separate rates in a treaty. There is no single treaty answer, so you have to read the one that applies to your country.
Whatever the answers, you tell the payer with a W-8BEN, and you do it before the payment is made. A withholding agent who has no W-8BEN in hand and who is personally liable for the tax will withhold. Nobody is going to take the risk on your behalf.
If money has already been withheld, the Form 1042-S you receive is your evidence of what was taken. Recovering anything withheld in excess of what you owe means filing a U.S. tax return and then waiting for the IRS. Sending a correct W-8BEN before the invoice is paid is much faster than getting the money back afterwards.
Where the two lanes split
| 🇺🇸 U.S. person | 🌏 Not a U.S. person | |
|---|---|---|
| Does the 30 percent rule reach you? | No. It applies to foreign persons | Yes, by default |
| What you give the payer | Form W-9 | Form W-8BEN |
| Rate if you give the payer nothing | 24 percent backup withholding, in the situations the IRS lists | 30 percent of the gross payment |
| Can a tax treaty lower the rate? | Not relevant | Yes, if a treaty with your country covers that income |
| What the payer files about you | Form 1099 | Form 1042-S, plus Form 1042 |
| Governing sections | Backup withholding rules | IRC 1441, 1442, 1443 |
| When you pay a foreign person | You are the withholding agent, personally liable | You are also a withholding agent if you control the payment |
The last row is the one people miss. The definition of a withholding agent covers "a U.S. or foreign person." Being a non-resident yourself does not exempt you when you are the one making the payment.
Common mistakes
🇺🇸 If the IRS counts you as a U.S. person
- Paying a foreign contractor or a foreign investor without collecting a W-8BEN, on the theory that the recipient sorts out their own taxes. Your liability is independent of theirs.
- Sending a foreign payee a 1099. Payments subject to NRA withholding belong on Form 1042-S, with Form 1042 filed for the year.
- Ignoring a payer's request for a W-9 and then being surprised by 24 percent backup withholding.
🌏 If it does not
- Doing nothing until tax season. The 30 percent is taken when the payment is made. Once it is gone, getting it back is a filing exercise, not a phone call.
- Mailing Form W-8BEN to the IRS. It goes to the payer.
- Assuming that because your LLC is American, you are too, and signing a W-9. Owning a U.S. company does not make you a U.S. person. A false W-9 is a much bigger problem than a 30 percent withholding.
- Assuming every dollar from a U.S. client is U.S. source income. For services, the source is where you performed the work.
FAQ
Why did my U.S. client keep 30% of my invoice?
Because they are a withholding agent and they are personally liable for the tax if they get it wrong. Under IRC section 1441 the default on a covered payment to a foreign person is 30 percent of the gross amount. If they did not have a valid Form W-8BEN from you, withholding is the safe choice for them.
Where do I send Form W-8BEN?
To the payer, not to the IRS. The IRS says to "give Form W-8 BEN to the withholding agent or payer." The payer keeps it and relies on it.
Is the 30% taken on my profit or on the whole invoice?
On the whole payment. Section 1441(a) requires the agent to "deduct and withhold from such items a tax equal to 30 percent thereof." Your costs are not subtracted at this stage.
I do all of my work from outside the United States. Is my invoice U.S. source income?
For personal services, the IRS rule is that the place where the services are performed determines the source, "regardless of where the contract was made, or the place of payment, or the residence of the payer." Work performed outside the United States is generally not U.S. source. Where your client sits does not decide it.
Does a tax treaty always cut the 30% to zero?
No. A treaty may give a reduced rate or an exemption, and the rate usually differs by type of income. There is no single number that applies everywhere. You have to check the treaty between the United States and your country, and then claim the rate on your W-8BEN.
Is this the same as backup withholding?
No. Backup withholding is a separate rule, its current rate is 24 percent, and it applies to payees who did not give a correct TIN or who failed to report interest and dividend income. NRA withholding is 30 percent and applies to foreign persons under sections 1441 to 1443.
I am a U.S. person hiring a freelancer abroad. Do I have to withhold 30%?
You have to check, and the burden is on you. You are the withholding agent, and the IRS says you are personally liable for any tax required to be withheld. Start by collecting a W-8BEN, then determine whether the payment is U.S. source and whether it is a type of income covered by these sections. Services performed entirely outside the United States are generally not U.S. source income.
Does owning a U.S. LLC stop the 30% from applying to me?
No. Where your company is registered and whether the IRS counts you as a U.S. person are two separate questions. A non-resident who owns a Wyoming LLC is still a non-resident, and still gives payers a W-8BEN, not a W-9.