When it comes to supplemental income payments—such as bonuses or equity income—it is crucial to understand the correct federal income tax withholding rates for nonresident aliens. A common misconception is that nonresident aliens are subject to the same withholding rate as U.S. persons (citizens, green card holders, and resident aliens). However, that is not the case, and the distinction is governed by specific provisions in the Internal Revenue Code (IRC) and accompanying regulations.
Applicable Withholding Rate
According to IRC Section 1441(a), supplemental income payments sourced in the U.S. and made to nonresident aliens should generally be subject to withholding at a rate of 30%, unless an exception applies. Exceptions may include income exempt under the IRC, provisions of an income tax treaty, or the reduced withholding rate of 14% for certain items paid to individuals holding F, J, M, or Q visas.
For supplemental payments under $1 million, the federal withholding rate for nonresident aliens remains at the standard 30%. This rate contrasts with the 22% withholding applicable to U.S. persons for similar payments. It is vital for organizations to correctly apply this distinction to verify compliance with tax regulations and prevent underwithholding.
Withholding on Payments Over $1 Million
Once cumulative supplemental payments to a nonresident alien exceed $1 million during a calendar year, the withholding rate changes. In accordance with Reg. 31.3402(g)-1(a)(2), payments above this threshold must be subject to withholding at the highest tax rate under IRC Section 1 applicable for the calendar year. For 2025, this rate is set at 37%.
Misconceptions and Correct Practices
A frequent misunderstanding involves the application of the 22% withholding rate to nonresident aliens that is correct only for U.S. persons receiving supplemental payments under $1 million. However, unless an income tax treaty or other IRC provision reduces the rate, the federal withholding tax rate for NRAs remains at 30% for supplemental payments up to $1 million and increases to 37% for payments exceeding $1 million.
Historical practices may have led to the incorrect application of the U.S. person withholding rate to NRA supplemental payments. This issue underscores the importance of confirming that a company’s payroll or stock-based equity reporting and withholding platform reflects the proper rates and distinctions for nonresident aliens.
With the use of a technology platform such as BDO’s Global Equity Mobility Solution, employers can feel confident that their reporting and withholding obligations are met.
Conclusion
Understanding and correctly applying the withholding rates for nonresident aliens is essential for compliance with IRS regulations. Supplemental payments sourced in the U.S. should be subject to withholding at a rate of 30%, and for payments exceeding $1 million, the rate rises to 37%. By addressing and correcting common misconceptions, organizations can avoid errors and ensure proper adherence to tax laws.
Please visit BDO’s Global Employer Services page for more information on how BDO can help.