Determining Withholding Rates

Determining the correct withholding rate is not a single step decision. It requires interpreting documentation, regulatory rules. Treaty claims can reduce withholding, but only if proper documentation is in place and maintained. 

Sometimes IRC or internal revenue code exemptions may apply. A strong process ensures that all three of these components are evaluated consistently, not manually, not reactively, but through controlled and repeatable logic. So, you must look at whether the the customer, the payee, if they’ve accurately claimed a reduced rate of withholding on their form W-8. 

If they did not claim a reduced rate of withholding, you may deem to withhold at 30%. If they made a claim, but the claim itself is not valid, so for example, maybe they did not provide a US or a foreign TIN, then the reduced rate of withholding should not be given and you need to withhold at the maximum rate. It’s important in light of that to be aware of the countries with which the US has an income tax treaty with.

 From there, you also have to consider whether any backup withholding is required. It may be required on payments to US persons who are receiving certain payment types where they have not provided a valid TIN on a W-9 or where the payer is actually been notified or received a B notice indicating that backup withholding is required. It’s important to remember you’re not done after this step. This is actually all leading up to you being able to appropriately withhold and then appropriately report.