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What is FDAP?

Do you make payments of U.S. source fixed, determinable, annual, or periodic (FDAP) income? If so, join us for a refresher on FDAP income including what it is and reporting implications.

Who is impacted 

Any personnel working with U.S. withholding agents or payors that make payments of U.S. sourced fixed, determinable, annual, or periodical income may be interested in a quick refresher to explain, what is FDAP income? 

So, what is FDAP? 

The IRS defines FDAP in extremely broad and general terms:

Fixed:  Income is considered to be fixed when a person knows ahead of time the amount of income that will be paid. 

Determinable:  If there is a basis for determining the amount of payment, then the amount of income will be considered to be determinable.    The income does not have to be paid annually or at regular intervals. 

Annual:  This means that the income is paid on an annual or yearly basis; however, the interval of time does not have to be exact. 

Periodical:  Income is periodic if it is paid from time to time. The timing does not have to be at regular intervals or on an annual basis.  The timing between payments may increase or decrease. This includes income that is paid in a series of repeated payments or in a single lump sum.  

Some common forms of FDAP income that may impact: tax, accounts payable, treasury, legal, and other operations departments include: 

  • Compensation for personal services 
  • Dividends 
  • Interest 
  • And Royalties 

These are just some of the income types, but be sure to read our article which includes the full list. 

How to implement 

Personnel working with U.S. withholding agents, payors in a tax department and any other departments associated with U.S. federal tax withholding and information reporting should consider all these questions  

–      Is the payment FDAP income? 

–      What is the character of the payment (is it one of the above-mentioned examples?) 

–      Is the payment treated as income to the person receiving the payment? 

–      Is the FDAP income from sources within the United States? 

Once you have the answers, you can then determine whether this income is being paid to a U.S. or non- U.S. person and whether you should report the income on a Form 1099 or Form 1042-S. Be sure to look for our upcoming articles that describes income effectively connected to a U.S. trade or business (ECI) and income that is excluded from the definition of FDAP! 

Be sure to read our full article on this topic for a in-depth breakdown of FDAP. If you like this video make sure to follow us on linked-in, twitter and visit our website. 

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