Paying Artists Overseas

2008-08-14 by

Today TaxMama hears from Barb in Kentucky who tells us, “I have a client that is hiring artists from Japan & Italy on a subcontracting basis. Is there any special thing that I need to be aware of in this case? He will pay them with a company check and we will issue 1099-MISCs.”

Hi Barb,

Great to hear from you.

First of all, since the payments are going to foreign nationals, there’s no 1099-MISC needed. They won’t even have US taxpayer ID numbers.

Of course, if your client knows they are US citizens or green card holders, then, yes, have them fill out a W-9 and issue the 1099-MISC.

What does your client need to do?

Get invoices before issuing payments. Preferably in English. If the artists don’t really know how to issue an invoice, have them use FreshBooks.
There is no charge for the first three clients they each put into their accounts. And since they’ll only have the one US client, they can use the service for free.

And prove the payments went overseas. This can be done via cancelled checks, wire transfers, or PayPal. Easy, see?

OOOPS – you will also need to have them submit a Form W8-BEN – Read Roger B. Adams, EA’s comment with excellent information. Roger is TaxMama’s expert on all things international.

And remember, you can find answers to all kinds of questions about paying outsourced workers and other tax issues, free. Where? Where else? At TaxMama.com

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  1. Roger B. Adams Says:

    These payments fall under §§.871 http://www.fourmilab.ch/ustax/www/t26-A-1-N-II-A-871.html and 1441 http://www.fourmilab.ch/ustax/www/t26-A-3-A-1441.html

    You are correct, personal services performed outside the United States by nonresident alien (NRA) individuals themselves or nonresident alien individuals under contract with a U.S. corporation or foreign corporation are not considered to be U.S. source income under IRC 862(a)(3), even though the payment is made by a resident of the USA (e.g., a U.S. citizen or a U.S. corporation).

    Under sections 871 and 872 of the Code, only the U.S. source income, or the income which is effectively connected with a U.S. trade or business, of a nonresident alien individual is considered to be gross income and is taxed by the U.S. Under sections 881 and 882 of the Code, only the U.S. source income, or the income which is effectively connected with a U.S. trade or business, of a foreign corporation is considered to be gross income and is taxed by the U.S.

    Under IRC 1441(a), only income which is considered to be U.S. gross income is subject to withholding of U.S. federal income tax. Under IRC 1461 of the Code, and the regulations thereunder, the foreign source income of a foreign person which is not subject to withholding of U.S. federal income tax is not reportable to the IRS on Form 1042-S.

    Therefore, payments made by a U.S. corporation to a foreign corporation in exchange for personal services performed outside the USA by nonresident aliens under contract with the foreign corporation, or by nonresident aliens in their own right, are not subject to U.S. taxation, are not subject to withholding of U.S. federal income tax, and are not reportable to the IRS on Form 1042-S.

    Rather, almost certainly, these payments are taxable by the country or countries in which the personal services were performed, and may be subject to withholding of income tax on behalf of the country or countries in which the personal services were performed. The payor of the income should consult the taxing authorities of the country or countries in which the personal services are performed. The taxing authorities of many foreign countries have websites on the internet. Or the payor should consult an international accounting firm.

    In the “example” that you outlined in your e-mail (below), the nonresident alien payee (Carlos) should provide Form W-8BEN to the withholding agent (the Magazine) in order to inform the withholding agent that the payee is a foreign person not subject to withholding of U.S. federal income tax with respect to foreign source income. Since no treaty benefits are being claimed and the payee is a nonresident alien, no TIN is required and Section II of the W-8BEN is not to be completed.

    Some key points:

    1. It is not necessary to file a 1042-S with the IRS because, for tax purposes, this payment is not US gross income.

    2. The NRA does submit a W8-BEN to the payor but an ITIN IS NOT REQUIRED since no treaty benefit is claimed.

    This is good stuff! Of course the W8-BEN would be accompanied by a letter from the tax professional spelling all this out to the payor.

  2. Diane Says:

    My brother owns his own pottery shop and may contract work oversees at some point in his career; this is good to know

  3. Thomas Says:

    So filing the W8-BEN will relief the payor of withholding any taxes or can each treaty explain the % of withholding taxes (perhaps lower than 30%)?

  4. Roger B. Adams Says:

    The point is this Thomas; a nonresident alien performing personal services without the US is NEVER subject to US taxation because this is NEVER gross income for US tax purposes.Thus, there is no withholding tax issue.
    The W8-BEN just gives the payor safe haven for reporting purposes.

  5. Angie Says:

    If the NRA comes to the US to occasionally perform services but maintains the NRA status, do I have the NRA submit a W8-BEN, claiming tax treaty relief? Also, would I submit a 1042S for the payments for services performed here in the US? Thank you

  6. Roger B. Adams Says:

    Sorry Angie, I missed your question.

    What treaty article would you cite in this case? What is the specified treaty rate if any?

    I recommend you take a look at §861(a)(3), and 861 (b)

  7. Brian Moran Says:

    Roger, thanks for the great info so far. If a Spanish NRA is claiming treating benefits under http://www.irs.gov/pub/irs-trty/spain.pdf for 'independent services'; and the NRA provides a W8-BEN; do I have to do withholding for payments related to US source income. One CPA has told me that W8-BEN is a shield for all payments to the NRA; while another has said it simply certifies that I don't have to do witholding on non-US source income, but I DO have to withold on US source income; even if the income would not be taxable under the Spain/USA treaty.


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