Navigating US tax rules can be daunting, especially for foreign partners and nonresident investors with income connected to a partnership in the United States. One of the most important compliance areas is the partnership withholding tax regime, governed under withholding tax Section 1446 of the Internal Revenue Code. To meet these requirements, partnerships file Form 8804 and issue Form 8805 to each foreign partner.
At 1040 Abroad, we specialize in cross-border taxation for US expats and nonresident aliens. With more than a decade of experience, we guide clients through the complexities of effectively connected taxable income, withholding, and annual return for partnership filing requirements.
What Is Form 8804?
Form 8804 is the IRS tax return that partnerships use to report and pay withholding tax on income allocated to foreign partners. Under Section 1446 of the IRC, partnerships with effectively connected taxable income (ECTI) must withhold tax on each foreign partner’s share, even if no cash is distributed.
In practice, Form 8804 summarizes the partnership’s total withholding tax liability for the year and reports the amounts already paid through estimated or installment payments. Each foreign partner then receives a Form 8805 showing their individual share of income and tax withheld.
Key points about Form 8804:
- It calculates the withholding tax..
- It reports the total amount of withholding applied to foreign partners.
- It determines whether estimated tax or installment payments were sufficient to cover the tax liability.
- It must be filed by the due date (generally the 15th day of the 4th month following the close of the partnership’s tax year).
Failure to file the annual return for partnership on time may result in a late payment penalty, an underpayment penalty, or even a minimum penalty up to the maximum penalty allowed by law if the partnership fails repeatedly.
What Is Form 8805?
Form 8805 is the IRS statement issued to each foreign partner showing their share of a partnership’s effectively connected taxable income (ECTI) and the tax withheld on that income. It serves as the partner’s proof of withholding, much like a W-2 or 1099 for U.S. taxpayers.
The form includes the foreign partner’s name, address, taxpayer identification number (or employer identification number), the amount of ECTI allocated, and the withholding tax applied. Partnerships must provide a copy of Form 8805 to every foreign partner and file copies with the IRS.
This ensures that foreign partners—whether individuals, corporations, or other entities—receive proper credit for taxes already paid on their behalf when they file their own U.S. tax return.
Who Must File?
Any partnership with foreign partners and effectively connected taxable income (ECTI) must file Form 8804 and issue Form 8805. This rule applies to U.S. partnerships, foreign partnerships, and even publicly traded partnerships with cross-border investors.
Each partnership must file Form 8804 as the annual return and prepare a separate Form 8805 for every foreign partner, regardless of whether the partner’s share of income is positive or a negative number.
The filing requirements are strict: both forms are required each tax year to ensure the IRS can track withholding tax and give proper credit to foreign partners.
How the Withholding Tax Works
Withholding tax on foreign partners is based on their share of a partnership’s effectively connected taxable income (ECTI). In most cases, the withholding tax rate is the highest rate that applies to individuals or corporations, unless a tax treaty allows for a lower rate.
Under Section 1446, partnerships must withhold tax even if no cash distribution is made. To stay compliant, partnerships generally make quarterly installment or estimated tax payments during the tax year.
If the partnership does not withhold or pay enough, the IRS may assess penalties and interest. While this system protects the IRS from unpaid tax, it also ensures that foreign partners receive credit for taxes already withheld when they file their U.S. tax return.
Deadlines and Penalties
Form 8804 and Form 8805 are generally due by April 15th for calendar-year partnerships (the 15th day of the 4th month after the close of the partnership’s tax year). Missing this deadline can lead to costly penalties:
- Late filing penalty – $210 per partner, per month (up to 12 months). For large partnerships, this can quickly add up.
- Late payment penalty – 0.5% of the unpaid tax per month, up to 25% of the total owed.
- Underpayment penalty – charged if estimated or installment payments were insufficient during the year. The rate is based on the IRS underpayment interest rate.
- Minimum and maximum penalties – in severe cases, the IRS can apply the statutory maximums if the partnership fails repeatedly to comply.
The IRS may waive penalties if the partnership can demonstrate reasonable cause for the delay and makes a timely request for relief.
Practical Considerations for Foreign Partners
- Always verify that your foreign partner’s information statement (Form 8805) matches your partner’s share of effectively connected income.
- Retain the transmittal form to claim credit on your personal or corporate tax return.
- Ensure the correct rate of withholding was applied, especially if tax treaties reduce the default highest tax rate applicable.
- Review your total liability, including amounts withheld and paid, to avoid discrepancies.
How We Help
At 1040 Abroad, we work with foreign persons, foreign corporate partners, and non corporate foreign partners who must navigate partnership withholding. Our team ensures:
- Form 8804 annual return and Form 8805 filings are accurate and timely.
- Payments of withholding tax and installment payments are optimized to avoid penalty.
- Cross-border investors benefit from applicable tax treaties.
- Every partner’s share of effectively connected taxable income is reported correctly.
Whether you are part of a foreign partnership or investing in publicly traded partnerships, compliance with section 1446 withholding tax is essential. With our expertise, you can reduce your tax liability, avoid unpaid tax, and remain in good standing with the IRS.
