FDAP income: What nonresident aliens and US expats need to know

Written by  Susan Turcotte, CPA

Last updated Apr 20, 2026

FDAP income (Fixed, Determinable, Annual, or Periodical income) is a category of US-source income that the IRS taxes at a flat 30% rate when paid to nonresident aliens and foreign entities. FDAP covers interest, dividends, rents, royalties, and compensation from US sources.

This article covers the FDAP definition, the 30% FDAP withholding rate, FDAP vs ECI, treaty reductions, statutory exceptions, and Form 1042 reporting requirements. Misclassifying income as FDAP or ECI – or missing a Form W-8BEN – can result in overwithholding, underpayment penalties, or personal liability for the US payer.

What is FDAP income?

FDAP income (Fixed, Determinable, Annual, or Periodical income) is a category of US-source income that the IRS subjects to a flat 30% FDAP withholding tax on the gross amount when paid to nonresident aliens and foreign corporations. The FDAP income definition is codified under IRC §871(a) for individuals and IRC §881 for foreign corporations.

Each term in a fixed determinable annual or periodical has a specific legal meaning. Fixed means a set or calculable amount. Determinable means the amount is calculable in advance. Annual relates to a yearly period. Periodical means payable at regular intervals – but "annual or periodical" does not mean a payment must recur. A one-time payment qualifies as FDAP if it meets the other criteria.

FDAP rules apply to nonresident aliens – foreign individuals who fail the Substantial Presence Test and do not hold a green card. The resident alien vs nonresident alien distinction determines whether the FDAP rules apply at all.

What types of income are classified as FDAP?

FDAP income covers most types of passive US-source income paid to foreign persons, grouped here into 3 broad categories – though the IRS applies the rules to specific income items and codes.

Each group carries the same default 30% FDAP withholding rate unless a treaty or statutory exemption applies.

Investment and passive income

The following 5 income types are classified as FDAP investment and passive income under IRC §871(a):

1. Dividends – TFX client scenario: a German national holding shares in a US S&P 500 ETF received $5,000 in dividends from a US brokerage in 2025 – the brokerage withheld $1,500 (30% FDAP) before transfer.
2. Interest – interest on ordinary US bank deposits is generally exempt from chapter 3 withholding, though certain deposit interest paid to residents of information-exchange countries may still have to be reported on Form 1042-S.
3. Rents – a US LLC pays $18,000/year in rent to a foreign landlord for use of US commercial property: 30% FDAP withholding by the US payer.
4. Royalties – a US publisher pays $10,000 in royalties to a French author for US book rights: 30% withholding unless the US-France treaty reduces the rate.
5. Annuities and pensions paid from US sources to nonresident aliens.

A nonresident alien can elect under section 871(d) or 882(d) to treat US rental real estate income as effectively connected; the election applies to all income from that property, and the withholding agent should generally receive Form W-8ECI with the election or a statement of intent to elect attached.

Compensation and service income

The following 4 types of compensation qualify as FDAP income when services are performed inside the United States:

1. Wages, salaries, and fees for services performed in the US by NRAs can be subject to US withholding, but employee wages are generally handled under wage-withholding rules, while independent personal services are generally subject to 30% chapter 3 withholding unless a treaty or other exception applies.
   
   TFX client scenario: a UK consultant who flew to New York for a one-time $20,000 engagement with no ongoing US business presence received $14,000 after 30% FDAP withholding ($6,000) by the US client.
2. Prizes and awards from US sources (e.g., game show winnings paid to a foreign national).
3. Taxable scholarship and fellowship grants paid to nonresident aliens are generally subject to 14% withholding, not the standard 30% chapter 3 rate.
4. Covenant not to compete payments from US payers to foreign individuals – courts classify these as FDAP under IRC §871.

Compensation for services performed entirely outside the US is not US-source FDAP income – only the portion of compensation attributable to US-based services is subject to FDAP withholding.

Other FDAP income types

The following 5 less-obvious income types also qualify as FDAP under IRS Publication 515 (2026):

1. Social Security benefits paid to NRAs – 85% is treated as taxable FDAP income; SSA generally withholds 25.5% of the gross benefit (equivalent to 30% of the taxable portion). TFX client scenario: a British retiree receiving $12,000/year in US Social Security benefits has $10,200 (85%) classified as FDAP, with $3,060 withheld.
2. Substitute dividends in securities lending transactions.
3. Original issue discount (OID) on US bonds paid to NRAs.
4. Racing purses and sign-on bonuses paid by US sports franchises to foreign athletes.
5. Gambling winnings from US sources paid to NRAs.

Capital gains on the sale of US securities are generally NOT FDAP for NRAs present fewer than 183 days in the US – see the exceptions section below.

The FDAP income examples above cover the most common income types – dividends, interest, rents, royalties, compensation, and Social Security benefits – each subject to different withholding rules and potential treaty reductions.

FDAP income tax rate: The 30% flat withholding rule

The IRS taxes FDAP income at a flat 30% rate on the gross amount paid to nonresident aliens – no deductions are permitted. The withholding agent (the US payer) deducts and remits 30% before transferring the net amount to the foreign recipient. The legal basis is IRC §1441 for individuals and IRC §1442 for foreign corporations.

TFX client scenario: a Japanese investor held US dividend-paying stocks in 2025 and received three payments totaling $30,000. The US brokerage withheld $9,000 (30%) before transfer. Had the investor submitted Form W-8BEN claiming the US-Japan treaty rate of 10% on dividends, FDAP withholding would have been $3,000, saving $6,000.

A $10,000 FDAP payment results in $3,000 withheld and $7,000 net received; a $100,000 payment results in $30,000 withheld and $70,000 net received – no deductions reduce the taxable base.

Unlike ECI (which is taxed at graduated rates on net income after deductions), the FDAP tax allows zero deductions. For income with high associated costs – such as rental property or contract work – this gross-basis taxation can result in an effective rate far above 30% of actual profit.

FDAP vs ECI: Key differences explained

FDAP income and Effectively Connected Income (ECI) are the two primary categories of US-source income for nonresident aliens. FDAP income is taxed at a flat 30% on gross income – no deductions allowed. ECI is income connected to a US trade or business, taxed at the same graduated rates as US residents (10%–37%) on net income after deductions.

The key filing difference: FDAP requires no return if fully withheld at source, while ECI is generally reported on page 1 of Form 1040-NR when a nonresident alien is required to file a return.

For most nonresident aliens, FDAP income (dividends, interest, rent) is withheld at 30% by the US payer; ECI from an active US business is taxed at graduated rates (10%–37%) on net income after deductions on Form 1040-NR.

A single nonresident alien can have both FDAP and ECI income in the same tax year – each category is reported and taxed separately under its own rules on Form 1040-NR.

Income is classified as ECI when it is directly connected to a US trade or business, or when it passes the asset-use or business-activities test under IRC §864(c). Any US-source income that does not pass these tests defaults to FDAP treatment.

TFX client scenario: a French entrepreneur operates a US LLC restaurant in Miami (ECI – taxed at graduated rates on net profit after expenses) and also holds US S&P 500 ETFs paying dividends (FDAP – 30% withheld at source). Both categories applied simultaneously on the client's 2025 Form 1040-NR.

The same dual-category situation commonly applies to foreign contractors and US companies with passive US investments alongside active business income.

FDAP withholding: Who is responsible?

The withholding agent – the US person or entity making FDAP payments to a foreign person – is legally required to deduct 30% at source, deposit the tax with the IRS via EFTPS or IRS Direct Pay, and file Form 1042-S and Form 1042. The withholding agent's liability exists even if the foreign payee later pays the tax directly.

A withholding agent can be any US individual, corporation, partnership, LLC, trust, estate, or financial institution that makes FDAP payments to foreign persons. TFX client scenario: a US tech startup paying $50,000 in consulting fees to a Polish software developer in 2025 acted as the withholding agent and was required to withhold $15,000 (30%) before payment.

The withholding agent collects and remits tax on behalf of the foreign payee, who is the beneficial owner – the person economically entitled to the income. These are two distinct roles and two distinct legal obligations.

Foreign financial institutions can enter into Qualified Intermediary (QI) agreements with the IRS to assume withholding responsibilities on behalf of their clients, simplifying the withholding chain for cross-border investment income. The foreign withholding forms guide covers each form in the withholding ecosystem.

If a withholding agent fails to withhold, the agent may be liable for the tax, interest, and applicable penalties; if the foreign payee later pays, the agent can still remain liable for interest and penalties.

How tax treaties reduce FDAP withholding rates

The United States maintains income tax treaties with countries listed in IRS Table 3; use the IRS treaty tables as a quick reference and confirm the final rule in the actual treaty and protocol. Treaty benefits apply only when the foreign payee certifies eligibility by submitting Form W-8BEN (individuals) or Form W-8BEN-E (entities) to the withholding agent before the first FDAP payment.

US tax treaties can reduce FDAP withholding rates below the default 30%, but the exact rate varies by country, income type, and eligibility rules – always confirm the applicable rate in the actual treaty and protocol.

The lower dividend rate (5%) applies when the recipient owns 10%+ of the paying corporation; the higher rate (15%) applies otherwise. India is notable for maintaining higher FDAP withholding rates than most US treaty partners.

Most modern US tax treaties include a Limitation on Benefits (LOB) clause that prevents treaty shopping – the foreign recipient must be a resident of the treaty country and meet ownership or activity tests to qualify for reduced FDAP withholding rates.

FDAP reporting: Form 1042 and Form 1042-S

Withholding agents report FDAP payments and withheld taxes using Form 1042 (annual withholding return) and Form 1042-S (per-payee income statement), both due March 15 of the year following payment. Foreign recipients receive Form 1042-S as documentation of income received and taxes withheld – the FDAP equivalent of Form 1099.

Form 1042 covers the withholding agent's total annual FDAP payments and taxes withheld. A 6-month extension is available by filing Form 7004. For tax year 2025, Form 1042 must generally be filed electronically for many withholding agents; a waiver from the e-filing requirement may be available in limited hardship cases.

Form 1042-S is issued per payee per income type; use the income code that matches the payment type: 01 for interest, 06 for dividends, 09 for capital gains, 14 for real property income and natural resources royalties, and the specific royalty codes in Appendix A for other royalty payments. The withholding agent files with the IRS and provides a copy to the foreign recipient by March 15.

Deposit taxes electronically through EFTPS or IRS Direct Pay. If the undeposited tax is $2,000 or more at the end of a quarter-monthly period, deposit within 3 business days; if it is at least $200 but less than $2,000 at month-end, deposit within 15 days after month-end.

Foreign individuals who receive FDAP income and are not fully withheld at source must report it on Schedule NEC (Not Effectively Connected) of Form 1040-NR. A Canadian author receiving $15,000 in US royalties would file Form 1040-NR Schedule NEC to report the income and reconcile any withheld amount; the applicable treaty rate depends on the royalty type, as some copyright and artistic royalties may be exempt, while other royalties have different treaty caps.

Under FATCA (IRC §1471–§1474), withholding agents use Chapter 4 status codes on Form 1042-S alongside Chapter 3 FDAP codes. FATCA 30% withholding applies specifically to withholdable payments made to non-participating foreign financial institutions and recalcitrant account holders – not to all foreign recipients.

Exceptions and exclusions from FDAP withholding

Not all US-source income paid to foreign persons triggers the default 30% FDAP withholding.

The following 5 items cover the main exceptions and exclusions from FDAP withholding – some reduce or eliminate withholding, while others, such as ECI and most capital gains, fall outside FDAP treatment entirely:

1. Portfolio Interest Exemption (PIE) – interest paid on registered US debt obligations to NRAs is exempt from FDAP withholding under IRC §871(h), provided the payee owns less than 10% of the issuing company and is not a bank receiving interest on a loan.
   Pro Tip

   The FDAP portfolio interest exemption under IRC §871(h) reduces FDAP withholding on US bond interest from 30% to 0% for foreign holders with less than 10% ownership in the issuing company – foreign investors must certify status on Form W-8BEN to activate the exemption.
2. Bank deposit interest – interest paid to NRAs on deposits held at US banks is generally exempt from FDAP withholding under IRC §871(i). Exception: deposit interest paid to residents of countries on the IRS Form 1099-INT reporting list is subject to information reporting.
3. ECI election for rental income – a nonresident alien can elect under section 871(d) or 882(d) to treat US rental real estate income as effectively connected; the election applies to all income from that property, and the withholding agent should generally receive Form W-8ECI with the election or a statement of intent to elect attached. See: foreign rental income tax guide.
   Pro Tip

   A nonresident alien who elects ECI treatment for US rental income on Form 1040-NR can deduct mortgage interest, property tax, depreciation, and maintenance costs. TFX client scenario: a Korean national with a $200,000/year US rental property switched from FDAP (30% on $200,000 gross = $60,000 tax) to ECI net-basis taxation (graduated rates on $80,000 net after deductions = approximately $16,000 tax in 2025).
4. Effectively Connected Income exclusion – any income qualifying as ECI under IRC §864(c) is excluded from FDAP treatment entirely.
5. Certain capital gains – NRAs present fewer than 183 days in the US during the tax year are generally exempt from US tax on capital gains from US securities. Those present 183+ days pay 30% on net gains on Schedule NEC. Sale of US real property by a foreign person is governed by FIRPTA (IRC §1445) – see what FIRPTA is.

Conclusion

FDAP income rules affect nonresident aliens investing in US markets, foreign employees working temporarily in the US, and foreign-owned businesses with passive US-source income. Correctly classifying income as FDAP or ECI determines the applicable tax rate, filing obligations, and available deductions.

Taxes for Expats prepares Form 1040-NR, Form 1042-S reconciliations, and treaty benefit claims for nonresident aliens with US-source income. For a nonresident tax return, get a free consultation or start your nonresident return today.

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