When payments or incentives are made to non-residents, tax withholding rules apply. The human subject or the department must pay the 30 percent federal withholding tax at the time the money is disbursed. In the following examples, the incentive payment is $100.
- $70 is paid to the non-resident non-U.S. citizen.
- The transaction is processed for $100.
- Business Expense pays $30 to the IRS.
- $100 is paid to the non-resident non-U.S. citizen.
- The transaction is processed for $142.90.
- The additional $42.90 covers the required 30 percent tax payment (42.90 equals 30 percent of $142.90).
- Business Expense makes a payment of $42.90 to the IRS.
This is the "gross up" formula: desired payment amount + 42.9 percent of the desired payment amount.