Partnership Withholding: Everything You Need to Know About US Tax Forms 8804 & 8805

Partnership Withholding: Everything You Need to Know About US Tax Forms 8804 & 8805

If you are in a partnership with a foreign partner and it has income related to a business or enterprise in the United States, you must report the partnership withholding tax. All you have to do is to file forms 8805 and 8804.

This is a complicated area of US tax law, but don't worry! We're here to help you understand how foreign partner withholding works.

What is Partnership Withholding?

Suppose a nonresident alien is associated in a US partnership or a foreign partnership with effectively connected income (ECI) with a US business of trade. In that case, the partnership must maintain the foreign partner's ECI share. (This also applies to LLCs taxed as domestic or foreign partnerships.)

Partnerships are required to pay this withholding tax even if the partnership never distributes money to the foreign partner, regardless of the final tax payable by the foreign partners in the United States.

Withholding tax does not apply to revenue that is not linked to a business or businesses in the United States.

Partnerships with a Foreign Partner: what is the withholding rate?

Standard withholding rates are:

  • 35% for foreign business partners

  • 39.6% for non-corporate foreign partners

However, since the United States has tax treaties with certain countries, the rate may be lower for certain foreign partners. An expatriate CPA can help you calculate the correct rate for your business.

Are there exceptions?

The Internal Revenue Service allows foreign partners to prove certain partnership losses and deductions. Also, foreign partners can certify that their acquisition in the partnership will be the only way to contribute to the effectively connected income during this fiscal year.

In the case of these certifications, the partnership is not obliged to pay withholding tax to the partner as long as the estimated or actual annual tax payable is less than $1,000.

But, if no withholding tax is due, the partnership is still required to report the ECI income of the foreign partner. This can be done with Form 8805 and Form 8804.

What is Form 8805?

Form 8805 reports the amount of ECI allocated to a foreign partner. The association must send a completed copy of this Form to all the foreign partners concerned, even if no withholding tax is paid.

If withholding tax is paid, the foreign partner can attach Form 8805 to the individual US tax return to claim a credit for their share of the withholding tax.

What is the IRS Form 8804?

Form 8804 is a yearly summary of Form 8805 sent to foreign partners. The partnership must fill out form 8804 and affix a copy of 8805 for each foreign partner, even if no withholding tax is paid.

When do these forms expire?

Most partnerships are required to send copies of Form 8805 to each foreign partner by April 15. The exact time limit applies for submitting Form 8804 and copies of each Form 8805 to the Internal Revenue Service.

But, if the partnership is made up solely of foreign associates, the deadline for both forms is June 15.

If you cannot file on time, you can use Form 7004 to request an extension. Remember that this only extends the submission deadline, not the withholding payment deadline.

Since several small business tax deadlines fall on the exact dates, it is important to plan when completing Forms 8805 and 8804.

What happens if the partnership does not submit these forms on time?

The Internal Revenue Service imposes various penalties for not completing these forms or filing them late.

If the partnership does not file Form 8804 by the due date, the Internal Revenue will naturally charge a penalty of 5% of any unpaid withholding tax for each month (or part of a month) that has elapsed since the due date up to a maximum of 25% of the unpaid taxes. And if the partnership submits Form 8804 more than 60 (sixty) days late, the minimum penalty will be $330 unless the total amount owed is less.

What about Form 8805? If a partnership fails to:

  • Send copies of Form 8805 to your foreign partners

  • File duplicate copies with the IRS

  • Provide complete and factual information on each 8805 form

They may be sanctioned. The fine generally ranges from $50 to $280 for Form 8805, up to a maximum fine of $3,392,000.

However, in all these cases, you can avoid all penalties if you present a reasonable reason for the delay in filing.

How do I file Form 8804 and Form 8805?

Form 8805 is identical to the W-2 or 1099-MISC Form. All you need is some identifying information about the partnership and foreign partner. You will then need to complete the amount of taxes the partnership has withheld from foreign ECI partners.

Form 8804 is similar to Form W-3 or Form 1096. It simply summarizes the amounts withheld for each foreign partner. Note: you are required to attach a copy of Form 8805 to each foreign partner, whether or not there is a withholding tax paid.

If you owe tax deductions for a foreign partner, they must be paid using Form 8813. These payments are to be made quarterly during the tax year of April, June, September, and December 15.

Get help from an experienced Expat Accountant.

We hope this short read has cleared up any confusion you may have about Forms 8805 and 8804. However, understanding US tax requirements for foreign corporations can be challenging.

If you have questions, we will be happy to answer them. Contact us, and we will help you in any way possible.



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