Partnership Withholding Tax: Section 1446 Rules, Rates, and Forms

A partnership with income effectively connected to a U.S. trade or business must withhold tax on the portion of that income allocated to any foreign partner, at rates as high as 37% for individuals and 21% for corporations. This partnership withholding tax obligation sits with the partnership itself, not the foreign partner. The rules come from Internal Revenue Code Section 1446, and they apply whether or not the partnership actually distributes cash during the year.¹

When the Rules Apply

Two conditions have to be met at the same time. The partnership must have taxable income effectively connected with a U.S. trade or business, and some share of that income must be allocable to a foreign partner.¹ All-U.S. partnerships and partnerships with no effectively connected income fall outside Section 1446.

A foreign partner is any partner who is not a U.S. person. That covers nonresident alien individuals, foreign corporations, foreign partnerships, foreign trusts, and foreign estates.² Tax status controls, not location. A U.S. citizen living abroad is still a U.S. person and does not trigger withholding.

What Income Counts

Effectively connected income (ECI) is income tied to a real U.S. business operation. Within a partnership, the IRS treats these as ECI:

Revenue from selling goods or services to U.S. customers.
Gains from selling U.S. real property, and rental income when the foreign partner elects to treat it as ECI.
Compensation for personal services performed in the U.S. that are considerable, continuous, and regular.
Any income of a partnership that conducts a U.S. trade or business at any time during the year, because each foreign partner is treated as engaged in that business.³

One carve-out matters: a foreign person who only trades stocks, securities, or commodities through a U.S. broker is not conducting a U.S. trade or business, and that trading income is not ECI.³

The Rates

The partnership withholds at the highest tax rate that applies to the partner’s category. For 2026, that is 37% for noncorporate foreign partners (individuals, trusts, estates) and 21% for corporate foreign partners.⁴ A lower rate can apply to a specific income type when the partnership has proper documentation, but the top rate is the default.²

Foreign partners in a treaty country may qualify for a reduced rate on certain income. To claim it, the partner completes the treaty claim section of the appropriate W-8 form and provides a foreign tax identification number from their country of residence.⁵ Without that documentation, the partnership withholds at the full statutory rate.

Documentation From Each Foreign Partner

Before determining what to withhold, the partnership needs a valid W-8 from every foreign partner. The form depends on the entity type:

Form W-8BEN for a nonresident alien individual.
Form W-8BEN-E for a foreign corporation.
Form W-8IMY for a foreign partnership or foreign grantor trust.
Form W-8EXP for a foreign government or tax-exempt organization.²

Each form captures legal name, address, country of residence, and taxpayer identification number. Without a valid TIN, the partnership must withhold at the highest applicable rate and cannot apply any treaty reduction. If a partner’s circumstances change after filing, they have 30 days to notify the partnership and submit updated documentation.⁵

Forms, Deadlines, and Payments

Three forms drive the Section 1446 cycle:

Form 8813 is the payment voucher that goes with each installment during the year.⁶
Form 8804 is the annual return reporting total withholding liability.
Form 8805 is the per-partner statement showing each foreign partner’s share of income and tax withheld.⁷

Form 8804 and all copies of Form 8805 are due by the 15th day of the third month after the close of the partnership’s tax year. For calendar-year partnerships, that is March 15. Partnerships that keep their books outside the United States and Puerto Rico get an automatic extension to the 15th day of the sixth month.⁷ Any partnership can also request an extension on Form 7004. Each foreign partner needs their Form 8805 by the filing deadline so they can claim credit for the tax withheld on their own return.

Quarterly Installments

If total withholding for the year will hit $500 or more, the partnership must make quarterly installment payments on the 15th day of the 4th, 6th, 9th, and 12th months of its tax year. For calendar-year filers, that is April 15, June 15, September 15, and December 15.⁸ A due date landing on a weekend or legal holiday shifts to the next business day.

How to Pay

Payments can go through the Electronic Federal Tax Payment System (EFTPS), which produces an immediate confirmation. A check or money order with Form 8813 can also be mailed to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.⁹

Sales of a Partnership Interest

Section 1446 also reaches the exit. When a foreign partner sells or transfers an interest in a partnership that conducts a U.S. business, the buyer (the transferee) must withhold 10% of the total amount realized on the sale. The buyer avoids withholding only if the seller signs an affidavit under penalty of perjury stating their U.S. TIN and certifying they are not a foreign person. A buyer with actual knowledge that the affidavit is false cannot rely on it.¹

If the buyer fails to withhold, the partnership itself must withhold the missing amount plus interest from future distributions to that buyer under Section 1446(f)(4).¹ The transferee or partnership reports the tax on Form 8288 with Form 8288-C and must remit it within 20 days of the transfer.¹⁰

What Section 1446 Does Not Cover

Not every payment to a foreign partner runs through Section 1446. Fixed, Determinable, Annual, or Periodical (FDAP) income, meaning things like interest, dividends, non-elected rents, and royalties that are not connected to a U.S. business, falls under a separate regime in IRC Sections 1441–1443. That regime requires a flat 30% withholding on the gross payment and gets reported on Forms 1042 and 1042-S rather than 8804 and 8805.⁴ A partnership with both ECI and FDAP flowing to foreign partners has to run both systems in parallel.

Publicly Traded Partnerships

Publicly traded partnerships (PTPs) follow a modified version of the rules. A PTP withholds on actual distributions of ECI to foreign partners rather than on each partner’s allocable share, so the trigger is cash going out the door.⁴ The rates are the same: 37% noncorporate, 21% corporate. Distributions are reported on Forms 1042 and 1042-S alongside the standard Section 1446 forms, and brokers holding PTP units for foreign investors are pulled into the withholding chain when interests trade on an exchange.¹¹

Penalties and Interest

Enforcement consequences hit the partnership, not the foreign partners who received the income.¹² They stack.

Late filing of Form 8804 draws a penalty of 5% of the unpaid tax per month the return is late, capped at 25%. A separate failure-to-pay penalty of 0.5% per month applies when the return is on time but the tax is not, also capped at 25%. When both apply, the failure-to-file portion is reduced by the failure-to-pay amount for the overlapping months.¹³

Interest accrues on any unpaid withholding tax from the original due date of each installment. The IRS underpayment rate for the second quarter of 2026 is 6%, or 8% for large corporate underpayments.¹⁴ The rate resets quarterly, so a long delinquency compounds across multiple rate periods.

Form 1065, the partnership information return, carries its own late-filing penalty on top of the withholding penalties. The statutory base is $195 per partner per month for up to 12 months, adjusted annually for inflation.¹⁵ For a partnership with many foreign partners, missing both Form 1065 and Form 8804 can produce combined penalties that exceed the underlying tax.

1
Office of the Law Revision Counsel. 26 USC 1446 – Withholding of Tax on Foreign Partners Share of Effectively Connected Income
2
Internal Revenue Service. Who Must Withhold on Partnership Withholding
3
Internal Revenue Service. Effectively Connected Income (ECI)
4
Internal Revenue Service. Partnership Withholding
5
Internal Revenue Service. Instructions for Form W-8BEN
6
Internal Revenue Service. About Form 8813, Partnership Withholding Tax Payment Voucher (Section 1446)
7
Internal Revenue Service. Instructions for Forms 8804, 8805, and 8813
8
Internal Revenue Service. Instructions for Form 8804-W – Installment Payments of Section 1446 Tax for Partnerships
9
Internal Revenue Service. Reporting and Paying Tax on Partnership Withholding
10
eCFR. 26 CFR 1.1446(f)-2 – Withholding on the Transfer of a Non-Publicly Traded Partnership Interest
11
Internal Revenue Service. About Form 1042, Annual Withholding Tax Return for US Source Income of Foreign Persons
12
Internal Revenue Service. Helpful Hints for Partnerships With Foreign Partners
13
Office of the Law Revision Counsel. 26 US Code 6651 – Failure to File Tax Return or to Pay Tax
14
Internal Revenue Service. Internal Revenue Bulletin 2026-8
15
Office of the Law Revision Counsel. 26 USC 6698 – Failure to File Partnership Return