What are the basics of IRS Tax Forms 8804 & 8805 Foreign Partner's withholding?
The first element to understand is what is partnership withholding tax?
Suppose a non-resident alien is a partner in a US partnership or a foreign partnership with ECI to a US business or trade.
In that case, they must withhold the foreign partner’s share of the ECI.
This also applies to LLCs, whether domestic or foreign.
Partnerships must pay this even if they never make any cash distributions to the foreign partner, regardless of the foreign partners’ US tax liability.
The withholding tax does not apply to any income that isn’t effectively connected to a US business or trade.
Form 8805 reports the amount of Effectively Connected Income (ECI) allocated to a foreign partner.
The partnership must send a completed copy of this to all foreign partners involved, even if no withholding tax is paid.
If a withholding tax is paid, the foreign partner can then attach 8805 to their individual US 1040 tax return to claim a credit for their share of income that was withheld.
Form 8804 is an annual statement summary of any 8805 documents sent to foreign partners.
The partnership must complete 8804 and attach a copy of every foreign partner’s 8805 whether or not withholding tax is paid.
Who must file Form 8804 and Form 8805?
Form 8805 should be filed by a US-registered partnership with a foreign partner.
It should also be filed by a foreign-registered partnership with US income to report and withhold US taxes due on any foreign partner’s share of the partnership’s income.
It must withhold the taxes and pay to the IRS even if no distribution has been made.
8805 is to be filed by a US partnership to report payments of US taxes for a foreign partner on the partners’ share of the effectively connected income to a US business or trade.
A separate 8805 should be filed for each foreign partner.
8805 is used to report Section 1446 withholding tax.
8804 is an annual statement summary of the various 8805 documents that are sent to the foreign partners of a US partnership.
An 8805 must also be filed by the foreign partners of a foreign partnership with effectively connected income to a US trade or business.
A Form 8813 payment voucher should accompany the payment of any taxes required by Form 8805 and Form 8804.
How do I file Form 8804 and Form 8805?
All it requires is some identifying information about the partnership and the foreign partner in question.
Then you fill in the amount of tax withheld from the foreign partners’ ECI.
It simply summarizes the amounts withheld from each foreign partner.
If you do owe any withholding taxes for a foreign partner, these must be paid using Form 8813.
These payments must be made quarterly through the tax year, on the 15th of April, June, September and December.
What is Section 1446 withholding tax?
Section 1446 withholding tax is applicable when a partnership with a foreign partner derives income from trade or business within the US.
The partnership has to pay nominal tax on any profit that is allocable to the foreign partner.
When must Form 8805 and Form 8804 be filed?
Partnerships must send copies of 8805 to every foreign partner no later than 15th April.
The same deadlines apply for filing 8804 and duplicate copies of every 8805 sent to the IRS.
If the partnership is made up exclusively of foreign partners, the deadline for both forms is 15th June instead.
If you are unable to file on time, you can use Form 7004 to request an extension.
This only extends the deadline for filing, not the deadline for paying the withholding tax.