What Are the Corporate Withholding Tax Requirements?

Corporate withholding tax is a system where a corporation pays a portion of an individual’s or entity’s income tax directly to the government. This “pay-as-you-go” method ensures tax obligations are met throughout the year. The payer is responsible for withholding a percentage of the payment and remitting it to tax authorities.

This applies to various payments and payees, each with distinct rules. A corporation must identify which payments trigger withholding, calculate the correct amount, and follow deposit and reporting procedures. Failure to comply can lead to the corporation being held liable for the uncollected tax.

Payments Requiring Corporate Withholding

A corporation’s withholding obligation is triggered by specific payments made to different recipients. The requirements are divided based on whether the payment is made to a U.S. person or a foreign person.

Payments to U.S. Persons

The most common requirement for U.S. persons involves wages paid to employees, known as payroll withholding. The corporation deducts federal income tax, Social Security, and Medicare taxes from a paycheck. The amount withheld is based on the employee’s earnings and information provided on Form W-4, Employee’s Withholding Certificate.

Payments to non-employees, like independent contractors, generally do not require income tax withholding. However, these payments can become subject to “backup withholding” at a flat 24% rate. This occurs if the payee fails to provide a correct Taxpayer Identification Number (TIN) or if the IRS notifies the payer of past underreported income.

Payments to Foreign Persons

Payments to foreign individuals or entities follow different rules centered on “Fixed, Determinable, Annual, or Periodical” (FDAP) income. This includes payments like dividends, interest, and royalties. When a U.S. corporation makes a U.S.-source FDAP payment to a foreign person, it must withhold tax at a 30% rate, unless a tax treaty specifies a lower rate.

This requirement applies even if the payment is not made annually. For example, a U.S. corporation paying a dividend to a foreign shareholder must withhold 30% of it unless a tax treaty allows a reduced rate. The U.S. payer is responsible for determining the foreign status of its payees.

Documentation and Rate Calculation

After identifying a payment that requires withholding, a corporation must collect documentation from the payee to determine the correct tax rate. The required form depends on whether the payee is a U.S. or foreign person.

Required Payee Documentation

For payments to U.S. persons, the primary document is Form W-9, Request for Taxpayer Identification Number and Certification. On this form, the payee certifies their U.S. status and provides their TIN. A valid Form W-9 avoids the 24% backup withholding and is kept on record by the corporation.

For payments to foreign persons, the Form W-8 series is required. The specific form depends on the payee’s status, such as Form W-8BEN for individuals and Form W-8BEN-E for entities. These forms allow the payee to certify their non-U.S. status and claim a reduced withholding rate under a tax treaty. Without a valid W-8 form, the corporation must withhold at the default 30% rate.

Calculating the Withholding Amount

The calculation of the withholding amount is directly tied to the documentation provided by the payee. If a U.S. non-employee payee fails to provide a valid Form W-9, the corporation must apply the 24% backup withholding rate. The liability for this amount falls on the corporation if it fails to collect it.

For payments to foreign persons, the standard 30% rate applies unless a properly completed Form W-8 claiming treaty benefits is provided. These treaty rates vary significantly by country and type of income, such as a reduced rate for dividends or interest.

Depositing and Reporting Procedures

Once the correct amount of tax has been withheld, the corporation must follow specific procedures to deposit the funds with the IRS and report the transactions. These steps are distinct for payroll and nonpayroll withholding.

Depositing Withheld Taxes

The primary method for remitting withheld taxes is through the Electronic Federal Tax Payment System (EFTPS). This is a free Treasury Department service that allows businesses to make federal tax deposits electronically.

The deposit frequency for nonpayroll taxes is determined by the amount of tax reported in prior years. For taxes on Form 945, there are monthly or semiweekly schedules. The schedule for the current year is based on the total tax reported during a “lookback period,” which for 2025 is the 2023 calendar year.

A corporation is a monthly schedule depositor if its total tax during the lookback period was $50,000 or less. If the total tax exceeded $50,000, it must make semiweekly deposits. If a corporation’s total tax liability for the year is less than $2,500, it can pay the full amount with its annual Form 945.

Reporting to the IRS

After depositing the tax, corporations must report the amounts to the IRS using specific forms. For taxes withheld from employee wages, companies file Form 941, Employer’s QUARTERLY Federal Tax Return. This form reconciles the wages paid and taxes withheld each quarter.

For nonpayroll withholding, reporting is done annually. Form 945, Annual Return of Withheld Federal Income Tax, is used for backup withholding. For payments to foreign persons, corporations file Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and Form 1042-S for each foreign recipient.