Frequently Asked Questions
The appropriate tax treatment for any particular artist is extremely fact-specific, depending on the artist's country of residence, the amount of money earned by the artist in the U.S., and the artist's status as an "individual" or "business" for tax purposes. The information included in this FAQ is not legal advice. For advice on specific situations, contact a qualified tax attorney.
Compensation Subject to Withholding
Each year we conduct a competition for artists with a monetary prize. This year one of our prize winners is a nonresident alien. This is a prize, not compensation for services performed. Do we still withhold the 30%?
Yes – awards are considered income, and are subject to 30% withholding.
What is the withholding requirement if a payment is made to a foreign corporation? What about an individual who is incorporated in their home country?
For tax purposes, the IRS looks at the "beneficial owner" of the income. If a nonresident alien "participates in the profits" of the corporation, the alien is considered an individual for taxation and withholding.
The IRS seems to have given conflicting guidance in the past as to whether payments to third parties and expense reimbursements made under the “accountable plan” rules are subject to withholding. Can you explain?
The IRS previously advised that expense reimbursements and third-party payments were subject to withholding because they were concerned that, by not withholding, payers were not reporting compensation that may be subject to taxation under many tax treaties. The IRS view was that if payers did not withhold, the IRS would be relying only on the artist to accurately report total compensation on a tax return, without confirmation on the Form 1042-S from the payer regarding expense compensation. The IRS has since confirmed that payers are not required to withhold on expense compensation if they meet the accountable plan rules.
If an artist does not provide full documentation for an expense reimbursement, are we required to withhold?
Yes. If expense reimbursements do not meet the accountable plan rules, the reimbursements are considered income subject to withholding. We provide answers to the questions below for cases in which a U.S. organization must withhold on expense reimbursements that do not meet the accountable plan rules.
- We have an agreement with an airline by which our organization only pays 25% of the full fare price of the ticket. We also get preferential rates at hotels. How do we calculate the value of the ticket and hotel stay? Is it sufficient to check an online travel site, such as Expedia?
Expedia, Travelocity, and other similar sites are a great source for checking the fair market value of hotel and airline tickets.
- We often have volunteers pick artists up at the airport, and we frequently make beverages and snacks available in the green room. What is considered compensation subject to withholding, versus incidental benefits?
Anything that you are contractually obligated to provide to an artist is compensation subject to withholding. (Note, this does not mean, however, that big-ticket items that are not enumerated in the contract are exempt from withholding. You must still withhold on airfare, hotel, and other items.) On the other hand, if what you are providing is more in the nature of hospitality (e.g., beverages and snacks), it is not compensation and is not subject to withholding.
- Artists need to be paid promptly upon completion of a performance. It can be difficult to gather the amount we've paid to third parties (such as hotels) until some time after the performance. Can we pay the artist's fee immediately,and then issue a separate, later check to reimburse expenses?
- If there are no reimbursable expenses, and all other compensation subject to withholding was made through third parties, should we estimate the value (of the hotel, for instance) and withhold that from the artist's fee?
- If we estimate the expenses and withhold, how do we reconcile that after the actual numbers come in?
If you are off only by a bit, it's probably not worth the trouble. If you have over- or under-estimated an artist's withholding, this will be reconciled when the artist files his/her tax return and reports actual expenses.
- If the 30% withholding from the fee and expenses exceeds the total amount of the fee, how do I withhold?
Obviously, you cannot withhold more than you are actually paying to the artist. If the withholding exceeds the amount paid, you are liable only for withholding the amount to be paid.
Exemptions from Withholding
Artists often submit a Form 8233 to our organization to claim exemptions from withholding. I now understand that, since I can't verify the total amount the artist may earn in the course of a year, the Form 8233 will not sufficiently exempt the artist from withholding. Is there any circumstance in which I can accept the Form 8233 as proof of exemption from withholding?
There are only a few. Several countries are exempt from tax on all compensation paid for independent personal services (including the services of a performing artist). At present, these countries include Armenia, Azerbaijan, Belarus, Georgia, Hungary, Kazakhstan, Kyrgyzstan, Moldova, Poland, Russia, Tajikistan, Turkmenistan, and Uzbekistan. If an artist resides in one of these countries, and meets the other requirements of the pertinent tax treaty to qualify for the exemption, then a presenter may accept a properly completed Form 8233 from an artist to exempt that artist from withholding.
Compensation Earned by a Foreign Tax-Exempt Organization
Can a foreign nonprofit organization have their nonprofit status recognized in the U.S. with the help of a foreign lawyer? Or can only a U.S.-based lawyer certify the organization?
Only an attorney licensed to practice law in the United States may certify as to a foreign tax-exempt organization's tax status.
Central Withholding Agreement (CWA)
Does the IRS require artists to enter into CWAs? Is there any repercussion for not doing so, as long as the artist files a complete U.S. tax return?
No – there is certainly no requirement that an artist obtain a CWA. The CWA program exists only as an option for individual artists to reduce their withholding rate.
Taxpayer Identification Numbers – Individuals
Must an individual apply for a Social Security Number (SSN) while in the U.S.? Is there no way to apply from abroad?
While an individual used to be able to apply for and obtain an SSN abroad, this is no longer the case. An individual must apply in person in the U.S.
Must an artist remain in the city in which they apply for an SSN, or may they travel in the U.S. while it is pending?
An artist may travel through the U.S. after applying for an SSN.
If an artist can't remain in the U.S. long enough to qualify for an SSN, what should they do to obtain a U.S. Individual Tax Identification Number (ITIN) from the IRS?
Even if an artist does not have work authorization for a long enough period to qualify for an SSN, the artist should nonetheless make a formal application, and obtain a rejection letter. The IRS will not issue an ITIN to a performing artist without the letter of rejection from the Social Security Administration (SSA).
What can be done if the SSA never responds to an application for an SSN? How can an artist file for an ITIN, if the SSA does not issue a formal letter of rejection?
If the SSA fails to respond, follow up with them until they do issue a rejection letter. The IRS will not issue an ITIN without the letter of rejection from the SSA.
If an artist does not have an SSN or ITIN, are we allowed to pay them?
Yes. When reporting the income at the end of the year on forms 1042 and 1042-S, where it requests the individual's ID number, write "requested, not provided."
What form should a nonresident alien submit as proof of a U.S. tax identification number?
If there is no applicable tax treaty [the IRS suggests using the 8233 (for individuals) and the W-8BEN(for businesses)] to obtain an artist's tax ID number, it's important to be sure not to submit either the 8233 or W-8BEN to the IRS, since tax treaty benefits do not apply. However, if a U.S. arts organization presents one of these forms to an artist, the artist might expect that they will be exempt from taxes. Consider creating your own form for the artist to complete. For individual artists, the W-8BEN should be used when in place of a W-9 form, when a nonresident is providing the necessary info for tax reporting but is NOT claiming a treaty exemption.
Does every individual have to file a U.S. tax return, regardless of whether they are an independent contractor for a U.S.-based organization, or an employee of a foreign organization?
Generally, yes. There is an exemption for artists who are performing as employees, if they make less than the amount of their personal exemption in a given year. The personal exemption amount for the 2007 tax year is $3,400, but this amount is subject to change by the IRS every year. One can determine the current personal exemption amount by going to www.irs.gov and searching "personal exemption."
Our artists have found it difficult to obtain a U.S. tax ID, although tax is invariably withheld from their pay. Since these artists are likely overpaying U.S. taxes, are there any other risks being run by our artists in not submitting or being unable to submit a U.S. tax return through lack of a tax ID number?
Artists who perform in the U.S. are required to file U.S. tax returns. However, the penalty for failure to file a return is based on the amount of tax owed. Therefore, if the amount withheld exceeds the amount of tax that would be owed, there is no actual risk in failing to file a tax return. Note, however, that if the artist intends to enter into a Central Withholding Agreement (CWA) at some point in the future, the failure to file a U.S. tax return will prevent him/her from qualifying for a CWA.
Another consideration is whether the amounts withheld are being correctly applied to the artist's tax debt. If the artist has no tax identification number, there is a greater chance that the withheld taxes will not be appropriately credited toward the artist's debt. The moral here is that, even if taxes are withheld at the source, it still behooves the artist to obtain a tax identification number!
Will individuals that begin filing U.S. tax returns, but have not previously filed as required, be penalized because they are now showing up on the IRS "radar screen?"
No. Just because an artist begins filing U.S. tax returns does not necessarily mean that he or she has been delinquent in filing in the past, or that the IRS will necessarily apply penalties. (It could mean simply that the artist has not previously earned any income in the U.S.) What is more likely to trigger the IRS's interest is if a presenter reports an amount paid to a nonresident artist, and that nonresident artist fails to file a tax return.
If the foreign individual does not file a U.S. tax return, and an organization makes a payment through a U.S. management agency, who would the IRS require to pay the penalty – the organization, or the agency? Is the original payer liable?
If no one withholds and the artist does not file a U.S. return, everyone is liable – the organization, the agency, and the individual artist.
I bring in artist groups from a European country with which there is a tax treaty and have helped them acquire a Federal Tax ID number. As the W-8BEN form has been filled in, signed by the artist group and shared with the presenting venue, no income tax has been withheld before monies have been paid to foreign based artist groups. Should each individual artist and member of these groups still file an individual U.S. tax return for their share of personal income they have each received from these monies, even though they may have filed an individual return on their side with the country in which they are legally based?
If a group is exempt from tax and withholding pursuant to a tax treaty, the U.S. presenter's liability ends with obtaining a valid W-8BEN from the group. The group, however, is still required to withhold taxes on its payments to its performers. If individual artists are employees who earn less than the "personal exemption" amount in a tax year, the artists are not required to file U.S. tax returns. If, however, the performers are employees earning more than the personal exemption amount, or if they are independent contractors (regardless of the amount earned), then each individual performer is required to file a U.S. tax return.
For artists with limited English, completing a U.S. tax return can be very difficult. Where can they turn for help?
The IRS has a Taxpayer Advocate Service that strives to assist those who need help in preparing tax returns and related documents. By completing IRS Form 911, Request for Taxpayer Advocate Service Assistance, an individual may request assistance with any tax matter, and may request that the IRS contact him or her through an interpreter.
Also, the IRS offers publications that include glossaries of words and phrases used frequently in tax documents. The glossaries are currently available for the following languages: Spanish, Russian, Chinese, Korean and Vietnamese.