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Withholding Tax - All About U.S. Tax Forms 8804 and 8805

Withholding Tax - All About U.S. Tax Forms 8804 and 8805

If a partnership that has a foreign partner has income related to a trade or business in the United States, a partnership withholding must be reported. This is done by filling out forms 8805 and 8804.

It's a pretty complicated area of U.S. tax law, but don't worry! We're here to help you understand how partner withholding on foreign partners works.


What is Partnership Withholding?

Suppose a nonresident alien partner is in a U.S. partnership or a foreign partnership with effective connected income (ECI) with a U.S. business enterprise. In that case, that partnership must retain the foreign partner's ECI share. This also applies to LLCs that pay taxes as partnerships, domestic or foreign.

Partnerships are required by law to pay this withholding tax even if the company never distributes money to the foreign partner and regardless of the final tax liability of the foreign partners.

The good news is that withholding tax does not apply to income that is not related to a business or trade in the United States.


What is the withholding rate for a partnership with a foreign partner?

Standard withholding rates are:

  • 35% for foreign corporate partners

  • 39.6% for non-corporate foreign partners

However, because the United States has tax treaties with some countries, the rate may be lower for some foreign partners. An expatriate accountant can help you calculate the right rate for your business.


Are there any exceptions?

The IRS allows foreign partners to prove certain losses and deductions from the partnership. Foreign partners can also certify that their investment in the partnership will be the only way to contribute to the effective connected income during the fiscal year.

In the case of these certifications, the company will not be required to pay withholding tax to the foreign partner as long as the estimated annual or actual tax payable is less than $1,000.

Nonetheless, even if no withholding tax is due, the partnership still has to report the foreign partner's effective connected income. You can do this with forms 8805 and 8804.


What is Form 8805?

Form 8805 is used to report the effective connected income (ECI) amount allocated to a foreign partner. The association must send a complete copy of this form to all relevant foreign partners, even if there is no withholding tax.

If a withholding tax is paid, the foreign partner can attach Form 8805 to the U.S. income tax return to claim a credit for its share of the withholding tax.


What is Form 8804?

Form 8804 is an annual summary of Form 8805 that has been sent to foreign partners. The association must complete Form 8804 and attach a copy of each foreign associate 8805, even if no withholding tax is paid.


When are these forms due?

Most partnerships must send copies of Form 8805 to each foreign partner by April 15. The same time frame applies for submitting Form 8804 and duplicate copies of each Form 8805 to the IRS.

However, if the partnership is made up exclusively of foreign partners, the deadline for both forms is June 15.

If you are unable to file your return on time, you can use Form 7004 to request an extension. Just keep in mind that this only extends the filing time, not the withholding time.

Since many other small business tax deadlines fall on the same dates, it's important to plan ahead when filling out the 8805 and 8804 forms.


What if the business does not file these forms on time?

The IRS imposes various penalties for not completing these forms or for filing them too late.

If a partnership does not file Form 8804 by the due date, the IRS will typically charge a penalty of 5% of any unpaid withholding tax for each month (or part of a month) past the due date maturity at a maximum of 25% unpaid taxes. And if the company submits Form 8804 more than 60 days late, the minimum fine will be $330 unless the total amount owed is less.

What about Form 8805? If the partnership fails to:

  • File duplicates with the IRS

  • Provide complete and accurate information on each 8805 form

  • Send copies of form 8805 to its foreign partners

It may be subject to sanctions. The fine typically ranges from $50 to $280 for Form 8805, up to a maximum fine of $3,392,000.

However, in all of these cases, you can avoid all penalties if you can show a reasonable reason for the late filing.


How do I file Forms 8805 and 8804?

Form 8805 is similar to Form W-2 or Form 1099-MISC. All you need are some identifying information about the company and the foreign partner involved. You will then have to complete the number of fees that the partnership has withheld from the foreign partners of the ECI.

Form 8804 is more like Form W-3 or Form 1096. It simply summarizes the amounts withheld by each foreign partner. But keep in mind: you must attach a copy of Form 8805 to each foreign partner, regardless of the payment of any withholding tax.

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


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