FDAP income is fixed, determinable, annual, or periodical income from US sources, such as interest, dividends, rents, royalties, and compensation for services, that is paid to a foreign person and is subject to 30 percent NRA withholding on the gross amount unless a treaty applies.
FDAP income, short for fixed, determinable, annual, or periodical income, is the category of US-source income that triggers NRA withholding when it is paid to a foreign person. It is the income side of chapter 3 of the Internal Revenue Code: if a payment to a nonresident is US-source FDAP income, the payer generally must withhold 30 percent. The IRS defines and lists the categories on its FDAP income page, and the full mechanics live in Publication 515. For a US company paying foreign contractors, FDAP is the concept that decides whether a payment falls into the withholding regime at all.
The IRS breaks the term into its parts:
The IRS also notes that “it does not matter whether the income is paid in a series of repeated payments or in a single lump sum.” This is broad on purpose. Most ordinary, non-investment-gain income to a foreign person is FDAP.
The IRS lists these categories as FDAP:
For contractor payments, the line that matters most is compensation for personal services. A consulting fee, a design fee, or a development fee paid to a foreign person is FDAP. Whether it is taxable in the US then depends on whether it is US-source, which the source of income rules decide based on where the work is performed.
FDAP status alone does not create a US tax. Two things have to line up: the income must be FDAP, and it must be US-source. A foreign contractor’s fee is FDAP, but if the work is done abroad it is foreign source income, which sits outside chapter 3 withholding and is not reportable on Form 1042-S. If the work is done in the US, the fee is US-source FDAP income, and the 30 percent default applies unless a treaty cuts it.
The withholding flows in a predictable order:
The most important contrast is FDAP versus effectively connected income. The two are taxed in opposite ways:
A payment cannot be both at once. If income is effectively connected, it is taxed as ECI rather than as FDAP. Getting this wrong means either over-withholding on business income or under-withholding on passive income.
Omnivoo Contract Management classifies each foreign contractor payment by FDAP category and source, so a withholding agent knows exactly which payments enter the 30 percent regime and which stay outside it.
Effectively Connected Income (ECI) is income a foreign person earns from a US trade or business, taxed on a net basis at graduated rates rather than the flat 30 percent that applies to FDAP income, and documented to a payer on Form W-8ECI to remove it from NRA withholding.
Form 1042-S is the IRS information return a US withholding agent files to report US-source income paid to a foreign person and the tax withheld under chapters 3 and 4 of the Internal Revenue Code.
NRA withholding is the chapter 3 regime under Internal Revenue Code sections 1441 through 1443 that requires a US withholding agent to deduct tax, generally at a 30 percent statutory rate, from US-source FDAP income paid to a nonresident alien or foreign entity, unless a treaty or other exemption reduces the rate.
The source of income rules are the US tax rules that assign income to a US or foreign source by income type, and they are decisive for foreign payees because personal services income is sourced to where the services are physically performed, not where the payer or the contract sits.
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