The 30% withholding on US-source income explained

Most non-residents meet the 30% withholding when a US payer asks for a Form W-8. It is a flat tax collected at source, and it is often reduced or avoided entirely with the right form. This guide explains what it covers, what it does not, and how to get it right.

By Awais Jameel, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Non-residents generally face 30% US withholding on fixed or periodic US-source income that is not connected with a US business, such as dividends, royalties, rents and some interest. The payer withholds it before paying. A tax treaty can reduce the rate, some income is exempt, and income effectively connected with a US business is taxed at normal rates instead.

At a glance

Rate
30% of the gross payment
Applies to
Fixed or periodic US-source income not connected with a US business
Common examples
Dividends, royalties, rents, some interest
Often exempt
Bank deposit interest, portfolio interest, most capital gains
Reduced by
A tax treaty, claimed on Form W-8BEN or W-8BEN-E
Reporting
Form 1042-S to the payee; Form 1042 by the payer
The 30% withholding on US-source income explainedSteps: 1. The payer asks for a Form W-8; 2. The payer withholds; 3. The payer reports; 4. You use the 1042-S.THE PROCESS AT A GLANCEThe 30% withholding on US-source income explained1The payer asks for aForm W-8Form W-8BEN for individuals,W-8BEN-E for entities, W-8ECIfor business income2The payer withholds30%, or a lower treaty ratethe form supports3The payer reportsOn Form 1042-S to you and theIRS, and Form 1042, both byMarch 15 of the next year4You use the 1042-STo claim a credit or refundon a US return if too muchwas withheldChecked against official sourcesTax BakersThe 30% withholding on US-source income explainedSteps: 1. The payer asks for a Form W-8; 2. The payer withholds; 3. The payer reports; 4. You use the 1042-S.THE PROCESS AT A GLANCEThe 30% withholding on US-sourceincome explained1The payer asks for a Form W-8Form W-8BEN for individuals, W-8BEN-E forentities, W-8ECI for business income2The payer withholds30%, or a lower treaty rate the formsupports3The payer reportsOn Form 1042-S to you and the IRS, and Form1042, both by March 15 of the next year4You use the 1042-STo claim a credit or refund on a US returnif too much was withheldChecked against official sourcesTax Bakers
The process at a glance: 1. The payer asks for a Form W-8; 2. The payer withholds; 3. The payer reports; 4. You use the 1042-S.

What income does the 30% cover?

The rule applies to US-source income that is fixed, determinable, annual or periodic, known as FDAP income, when it is paid to a non-resident and is not effectively connected with a US trade or business. The tax is charged on the gross amount, with no deductions, and collected by the payer, called the withholding agent.

IncomeUsual treatment for a non-resident
Dividends from US corporations30%, or the treaty rate
Royalties for use of property in the US30%, or the treaty rate
Rents from US property30% of gross rent, unless the owner elects to treat it as business income
Interest on US bank depositsGenerally exempt
Portfolio interest on qualifying debtGenerally exempt
Capital gains on sharesGenerally not taxed, unless present in the US 183 days or more in the year
Pay for services performed outside the USForeign-source: not subject to US withholding
Income effectively connected with a US businessTaxed at graduated rates on a return instead

How does the withholding work?

  1. The payer asks for a Form W-8

    Form W-8BEN for individuals, W-8BEN-E for entities, W-8ECI for business income.

  2. The payer withholds

    30%, or a lower treaty rate the form supports.

  3. The payer reports

    On Form 1042-S to you and the IRS, and Form 1042, both by March 15 of the next year.

  4. You use the 1042-S

    To claim a credit or refund on a US return if too much was withheld.

See W-8BEN vs W-8BEN-E vs W-8ECI.

The forms themselves are explained in Forms 1042 and 1042-S.

How does a treaty reduce it?

If you are a resident of a treaty country, the treaty may cap the rate on dividends, interest or royalties. Claim it in Part II of Form W-8BEN or W-8BEN-E, naming the article and the rate. Without a valid form, the payer must withhold the full 30%. See tax treaties and your US LLC.

What about business income?

Income effectively connected with a US business is not subject to the 30% gross withholding. It is taxed on net profit at graduated rates, reported on Form 1040-NR or 1120-F, and claimed with Form W-8ECI. Partnerships withhold on foreign partners' shares of such income under a separate rule. See effectively connected income and foreign-owned multi-member LLCs.

How does this affect a foreign-owned LLC?

A single-member LLC owned by a foreign person is disregarded, so payers look through it and treat the owner as the payee. The owner gives a W-8 in their own name. For most service and online businesses run from abroad, customers' payments are business receipts, not FDAP income, so the 30% rule does not apply to them. It matters when the LLC receives dividends, royalties or rents, or pays them to foreign persons. See paying foreign contractors.

What if too much was withheld?

File a US return, usually Form 1040-NR, attaching the Form 1042-S, to claim a refund. The return must normally be filed within three years of its due date to get the refund. Individuals claiming a refund generally need an ITIN. See ITIN for a foreign LLC owner.

What if your LLC is the payer?

A US LLC paying FDAP income to a foreign person is a withholding agent. It must withhold, deposit the tax, and file Forms 1042-S and 1042. A withholding agent that fails to withhold is liable for the tax itself.

Being withheld at 30%?

We check whether a treaty rate or exemption applies, complete the right W-8, and file for a refund if too much was withheld.

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Questions people ask

What is the 30% withholding tax for non-residents?

A flat US tax collected by the payer on fixed or periodic US-source income, such as dividends and royalties, paid to non-residents and not connected with a US business.

How can I reduce the 30% withholding?

Claim a treaty rate on Form W-8BEN or W-8BEN-E, if you are a resident of a treaty country.

Is US bank interest subject to 30% withholding for non-residents?

Generally no. Interest on US bank deposits paid to non-residents is generally exempt.

How do I get back tax withheld at 30%?

File a US return, usually Form 1040-NR, with the Form 1042-S, normally within three years of its due date.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IRS Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities
  2. IRS: Fixed, determinable, annual, periodical (FDAP) income
  3. IRS: Instructions for Form 1042-S
  4. IRS: Taxation of nonresident aliens

Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.

Foreign-owned and non-resident companiesW-8BEN vs W-8BEN-E vs W-8ECI: which form to giveForeign-owned and non-resident companiesTax treaties and your US LLC: how they change what you oweForeign-owned and non-resident companiesEffectively connected income explained for foreign owners

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This guide is general information. It is not tax or legal advice for your situation.