Withholding tax is the portion of income that a payer (like an employer, bank, or company) is required to deduct and send directly to the IRS on behalf of the person receiving the money.

It acts like a prepayment of taxes. Instead of waiting for you to file a tax return, the IRS collects part of your tax upfront.

👉 For nonresident aliens, this usually means 30% is withheld by default. If you have an ITIN (Individual Taxpayer Identification Number), you can file a U.S. tax return and:

  • Claim a refund if too much was withheld

  • Apply for reduced rates under a U.S. tax treaty

 

Everyday Examples of Withholding Tax

1. Employee Salary

Maria works for a U.S. company and earns $5,000 per month.

  • Her employer withholds $800 in federal income tax and sends it to the IRS.

  • Maria receives $4,200 in her bank account, but her tax record still shows the full $5,000.

👉 ITIN Connection: If Maria is a nonresident without an SSN, she needs an ITIN to file her U.S. tax return and reconcile her withheld taxes.

2. Foreign Investor in U.S. Stocks

Juan, a Mexican resident, earns $1,000 in U.S. dividends.

  • By default, the U.S. applies 30% withholding = $300.

  • Juan only gets $700.

👉 ITIN Connection: With an ITIN, Juan can claim the U.S.–Mexico tax treaty and reduce the tax to 10–15%, saving money and avoiding excess withholding.

3. Freelancer Paid by a U.S. Company

Asha, in India, earns $2,000 from a U.S. client.

  • Without an ITIN or treaty claim, the client withholds 30% = $600.

  • Asha receives only $1,400.

👉 ITIN Connection: With an ITIN, she can file a U.S. tax return, apply the treaty benefit, and claim a refund of the $600 withheld.

4. U.S. Real Estate Sale (FIRPTA Rule)

Carlos, a Spanish citizen, sells U.S. property for $200,000.

  • The buyer must withhold 15% = $30,000 under FIRPTA rules.

  • Carlos files a tax return later, showing his actual gain was only $10,000.

👉 ITIN Connection: Carlos needs an ITIN to file his return and recover the excess tax withheld.

Why ITIN Applicants Should Care

  • Ensures you can recover overpaid taxes

  • Allows you to claim treaty benefits (reduced withholding rates)

  • Keeps you compliant with U.S. tax laws

  • Prevents you from permanently losing money to the IRS

 

👉 In short: Withholding tax is a deduction made before you even receive your money. For ITIN applicants, it’s the key to filing correctly, claiming refunds, and benefiting from U.S. tax treaties.