“Other Federal Withholding” generally refers to federal income tax withholding that applies to payments other than regular wages, such as pensions, annuities, retirement distributions, and certain U.S.-source income paid to nonresident aliens. Different withholding rules apply depending on the type of income and the taxpayer’s U.S. tax status.
Withholding from Pension and Annuity Payments
U.S. payers making periodic pension or annuity payments are generally required to withhold federal income tax unless the recipient elects otherwise.
- Withholding is typically determined using Form W-4P (Withholding Certificate for Periodic Pension or Annuity Payments)
- The recipient may:
- Elect voluntary withholding, or
- Request no withholding if eligible
- Special rules may apply depending on residency status and payment type
Nonresident Alien Withholding (U.S.-Source Income)
Certain U.S.-source income paid to nonresident aliens is subject to withholding under IRS rules.
- A general withholding rate of 30% applies to certain fixed or determinable annual or periodic (FDAP) income, unless reduced by a tax treaty
- FDAP income may include items such as:
- Dividends
- Interest
- Royalties
- Proper documentation (such as Form W-8BEN) is generally required to establish foreign status and claim treaty benefits
30% Flat Rate Withholding
- U.S. source income not effectively connected with a U.S. trade or business (e.g., dividends, royalties) paid to nonresident aliens is subject to a 30% withholding rate (or lower treaty rate).
- U.S. citizens or resident aliens with foreign addresses may have withholding applied in error; they should use Form W-9 to notify the payer and request cessation of withholding.
- Any incorrectly withheld tax can be claimed as a credit on Form 1040 or Form 1040-SR.
Foreign Earned Income Exclusion (U.S. Citizens Abroad)
U.S. citizens or resident aliens working abroad may qualify for the foreign earned income exclusion under IRS rules.
- Eligibility is determined under:
- Bona fide residence test, or
- Physical presence test
- Employers may reduce or stop withholding if they reasonably expect the employee to qualify
- Employees may provide Form 673 to support withholding adjustments for foreign earned income exclusion eligibility
Social Security and Medicare Taxes
- These taxes may apply to wages paid for services performed outside the U.S., unless an exception applies (e.g., working on an American vessel/aircraft, for an American employer, or under a totalization agreement).
- Employers must consider whether services are performed on an American vessel or aircraft, or if the employee works for an American employer or foreign affiliate under a voluntary agreement.
Source:
Publication 54
Publication 505
Publication 515
Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.