Withholding Tax on Interest: Backup, 30% Rate, and Exemptions

Withholding tax on interest in the United States runs on two tracks. If you’re a U.S. person, no tax is withheld from your interest income unless something has gone wrong with your taxpayer identification or reporting, at which point backup withholding applies at 24%. If you’re a foreign person receiving U.S.-source interest, the default rate is 30%, though statutory exemptions and tax treaties often reduce it, sometimes to zero.

Backup Withholding at 24% for U.S. Persons

Most U.S. taxpayers never see a dime withheld from their interest. Banks report what they paid you on Form 1099-INT, and you settle up on your annual return. Backup withholding only starts when the payer has a specific reason to doubt your identification or compliance.¹

The rate is a flat 24% of the gross interest payment. Federal law requires payers to begin withholding for four reasons:²

You didn’t give the payer your taxpayer identification number.
The IRS notified the payer that the TIN you gave doesn’t match its records.
You underreported interest or dividend income on a prior return and the IRS sent notice.
You didn’t certify that you’re not subject to backup withholding when required.

The last two triggers apply only to interest and dividend payments.² To prevent backup withholding from the start, give the payer a completed Form W-9 when you open an account. It certifies your correct TIN and your status as a U.S. person.³

How to Stop Backup Withholding Once It Starts

Fix whatever triggered it. For a missing or incorrect TIN, provide the correct number to the payer and certify it. If you receive a second notice about an incorrect TIN, you’ll need to provide verification of your correct name and TIN rather than just a new certification. For underreported income, pay the amount owed or resolve the discrepancy with the IRS. If you haven’t filed a required return, file it.⁴

Backup withholding is not a penalty. It’s a prepayment. When you file your annual return, report the withheld amount and claim it as a credit against your total tax liability. Any excess comes back as a refund.⁴

What You’ll Receive

Payers must send a Form 1099-INT to anyone who earned at least $10 in interest during the year, or to anyone from whom they withheld any federal income tax under the backup withholding rules, regardless of amount.⁵ Even if you earn less than $10 and receive no form, you’re still required to report the interest.

The 30% Rate on Interest Paid to Foreign Persons

Interest paid from U.S. sources to nonresident aliens and foreign entities is subject to a default 30% withholding rate.⁶ It covers what the IRS calls “fixed or determinable annual or periodical” income, which sweeps in virtually all interest.⁷

Unlike backup withholding, this 30% generally acts as the final tax. The foreign recipient isn’t required to file a U.S. return to pay more, though they may file to claim a refund if too much was withheld.⁸

One important carve-out: if the foreign person’s interest is “effectively connected” with a U.S. trade or business, it’s taxed at the graduated rates that apply to U.S. citizens rather than the flat 30%. Deductions are allowed against that income, so the net figure often falls into a lower bracket.⁹

Statutory Exemptions That Eliminate the 30%

Three exemptions cover a large share of cross-border interest, and each one can knock the rate down to zero without any treaty involved.

Portfolio Interest

The most widely used exemption covers portfolio interest: interest on registered debt obligations where the foreign recipient owns less than 10% of the borrower. This exemption reaches most corporate bonds held by overseas investors.¹⁰

To qualify, the debt must be in registered form. Bearer bonds issued after March 18, 2012, don’t qualify due to a repeal of the relevant provision. The foreign holder must also certify they’re not a U.S. person and not a 10% shareholder, typically through Form W-8BEN or W-8BEN-E.¹¹

If the recipient does hold 10% or more of the borrower’s voting stock (for corporations) or capital/profits interest (for partnerships), portfolio treatment is off the table. A tax treaty may still cut the rate, but the statutory exemption won’t apply.¹⁰

Bank Deposit Interest

Interest on deposits with U.S. banks, savings institutions, and certain insurance companies is exempt from the 30% tax for foreign persons, provided the income isn’t connected with a U.S. trade or business.¹⁰ A nonresident alien with an ordinary U.S. savings account generally owes no withholding tax on the interest.

Short-Term Obligations

Interest on debt with an original maturity of 183 days or less is exempt. This exemption applies even when the payer holds no documentation from the payee, which is unusual. The payer may still need to report the payment on Form 1099 and apply backup withholding rules if the recipient hasn’t provided a TIN.¹²

Treaty Rates Below 30%

When no statutory exemption fits, foreign recipients can often claim a reduced rate under an income tax treaty. The United States has treaties with dozens of countries, and many set the rate on interest well below 30%. Some eliminate it entirely.

To claim a treaty rate, the recipient must provide documentation before the interest is paid. Individual nonresident aliens use Form W-8BEN, which certifies foreign status and identifies the treaty article supporting the reduced rate.¹³ Foreign entities use Form W-8BEN-E.¹⁴

Without the right form on file in time, the payer must withhold the full 30%. The recipient can still claim the treaty benefit later by filing Form 1040-NR and requesting a refund, but the money sits with the IRS in the meantime.

FATCA Adds a Layer, But Doesn’t Stack

The Foreign Account Tax Compliance Act sits on top of the standard rules. FATCA targets foreign financial institutions that haven’t agreed to report their U.S. account holders and foreign entities that won’t identify their substantial U.S. owners. When those entities receive U.S.-source interest, the payer withholds 30% under FATCA (Chapter 4).¹⁵

When a payment triggers both FATCA and the standard nonresident alien rules (Chapter 3), the payer applies FATCA first and doesn’t withhold separately under Chapter 3 on the same amount. Total withholding won’t exceed 30%.¹⁵ For most compliant foreign investors working through participating institutions, FATCA doesn’t change the amount withheld; withholding agents determine FATCA status by collecting a Form W-8 from the payee.¹⁶

Forms and Deadlines

U.S. Recipients

Payers report interest income and any backup withholding on Form 1099-INT. The form is required for anyone who earned at least $10 in interest, or anyone who had any federal tax withheld under backup withholding.⁵

Recipient copies and IRS electronic filings are due by January 31. For the 2025 tax year, the deadline shifts to February 2, 2026, because January 31 falls on a Saturday. Use the form to report interest and claim credit for any backup withholding.⁴

Foreign Recipients

Payers use Form 1042-S to report U.S.-source income paid to foreign persons. The form is required even when the withholding rate was 0% under a treaty or statutory exemption.¹⁷

The withholding agent also files Form 1042 as the annual summary return. Both forms are due by March 15. For the 2025 tax year, that shifts to March 16, 2026, because March 15 is a Sunday.¹⁸

Foreign recipients use Form 1042-S to report income on Form 1040-NR and claim credit for tax withheld. If your only U.S. tax was fully satisfied through withholding and you’re filing just to claim a refund, the IRS offers a simplified procedure that reduces the number of schedules needed.¹⁹

Penalties for Getting It Wrong

The IRS holds withholding agents personally liable for tax they were required to withhold, independently of the recipient’s own tax obligation. If the agent doesn’t withhold and the foreign payee doesn’t pay, both are on the hook for the tax, plus interest and penalties. Even when the foreign person ultimately pays their own liability, the agent can still face interest and penalties for the failure to withhold.²⁰

For returns due in 2026, per-form penalties for late or incorrect information returns, including Form 1099-INT and Form 1042-S, run as follows:²¹

Up to 30 days late: $60 per form.
31 days late through August 1: $130 per form.
After August 1 or never filed: $340 per form.
Intentional disregard: $680 per form, with no maximum penalty cap.

The same tiers apply to late or incorrect payee statements. Small businesses face lower annual caps on total penalties than large businesses, but the intentional disregard tier has no cap for anyone.²¹

1
Internal Revenue Service. Backup Withholding
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Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding
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Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification
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Internal Revenue Service. Topic No. 307, Backup Withholding
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Internal Revenue Service. About Form 1099-INT Interest Income
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Office of the Law Revision Counsel. 26 USC 1441 – Withholding of Tax on Nonresident Aliens
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Internal Revenue Service. Withholding on Specific Income
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Internal Revenue Service. NRA Withholding
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Internal Revenue Service. Characterization of Income of Nonresident Aliens
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Office of the Law Revision Counsel. 26 US Code 871 – Tax on Nonresident Alien Individuals
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Internal Revenue Service. Portfolio Debt Exemption – Requirements and Exceptions
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Internal Revenue Service. Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
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Internal Revenue Service. Instructions for Form W-8BEN
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Internal Revenue Service. Instructions for Form W-8BEN-E
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Internal Revenue Service. Withholding and Reporting Obligations
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Internal Revenue Service. Tax Withholding Types
17
Internal Revenue Service. Instructions for Form 1042-S
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Internal Revenue Service. Instructions for Form 1042
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Internal Revenue Service. Instructions for Form 1040-NR
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Internal Revenue Service. Withholding Agent
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Internal Revenue Service. Information Return Penalties