We promised a foreign vendor a net payment. Who bears any U.S. withholding tax?

A promise to pay a foreign vendor net of withholding can increase the payer's total contractual cost. Where U.S. withholding applies, tax paid on the vendor's behalf may itself enter the gross payment calculation. The contract cannot eliminate the payer's statutory withholding duties.

A specific business-owner situation

A licensing vendor demands $10,000 after any U.S. tax. Paying exactly that amount while depositing nothing does not satisfy a withholding obligation, and simply adding a guessed tax amount can understate the gross-up.

Illustrative example, not a client result.

What to establish before filing

1. Determine whether withholding actually applies.
2. Read the net-payment clause.
3. Calculate the gross amount and deposit reporting requirements.

Which fact changes the answer?

A valid treaty rate can change the gross-up cost, but requires eligibility and documentation. The contractual price alone does not establish the tax rate.

A mistake to avoid

Do not apply a withholding percentage to the promised net amount without checking the gross-up calculation.

Records that support the decision

• Executed contract.
• Payee certificates.
• Gross-up and deposit workpapers.

The decision to document

Quantify the full cost before agreeing to a net quote or releasing payment.

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Related questions

• A foreign supplier uses a U.S. bank account. Does that make it a U.S. payee for tax forms?
• We reimburse a foreign consultant's U.S. travel. Can those amounts be ignored when reviewing withholding?

Sources and editorial context

• IRS Publication 515: foreign-person withholding

General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.