International Tax and Withholding Issues for Entertainers and Athletes

By:
Carola Knoll, CPA
Published Date:
Aug 1, 2015

Entertainers and athletes that come into the United States to perform are subject to U.S. taxation at the federal level, and possibly at the state and local levels as well. This article will highlight various federal U.S. tax compliance issues they could face.

Determination of U.S. Residency

The first issue is the determination of whether the individual is a U.S. resident for tax purposes.  How the individual will be taxed by the United States hinges on residency. For tax purposes, an “alien” is an individual who is not a U.S. citizen. Aliens can be classified as either nonresident aliens or resident aliens:

  • Nonresident aliens. If the entertainer or athlete is an alien (not a U.S. citizen), he is considered a nonresident alien unless he meets one of two tests (described in the next bullet point). A nonresident alien usually is subject to U.S. income tax only on U.S. source income—that is,.income from sources within the United States and on certain income connected with the conduct of a trade or business in the United States, including wages attributable to services performed in the country. 
  • Resident aliens. The individual will be a resident alien of the United States for tax purposes if she meets either the green card test or the substantial presence test for the calendar year (January 1 through December 31). Even if neither test is met, an election may be made in some cases to choose to be treated as a U.S. resident for part of the year. A resident alien's income is generally subject to tax in the same manner as a U.S. citizen: she is taxed on and must report income from all sources, including sources outside the United States.

In the year of arrival or departure, an alien may be considered “dual status,” and thus taxed only on U.S. source income during the nonresidency period and on worldwide income during the residency period. For this reason, determining the tax residency start or end date is critically important.

Substantial Presence Test

If the individual doesn't have a green card, he will be treated as a U.S. resident alien if he has “substantial presence” in the United States. To meet this test, the individual must be physically present in the United States on at least 1) 31 days during the current year and 2)   183 days during the three-year period that includes the current year and the two years immediately before that, counting A) all the days an individual was present in the current year, B) one-third of the days she was present in the first year before the current year, and C) one-sixth of the days she was present in the second year before the current year.

Example. And individual was physically present in the United States on 120 days in each of the years 2015, 2014, and 2013. To determine if he meets the substantial presence test for 2015, count the full 120 days of presence in 2015, 40 days in 2014 (one-third of 120), and 20 days in 2013 (one-sixth of 120). Since the total for the three-year period is 180 days, he is not considered a resident under the substantial presence test for 2015.

Exceptions. There are a number of exceptions to the substantial presence test determination of U.S. tax residency.  The main exceptions are the following:

  • Treaty “Tie Breaker”: U.S. double tax treaties have articles to determine which country should be considered the country of residency. This is used in situations where domestic laws in both countries would consider the individual resident. Generally, where the individual has her permanent home is the country of residence for tax purposes if a treaty residency position is taken. If the person has a permanent home in both countries, then the country in which the person has her center of vital interests would be the country of residence.
  • Exempt Individuals: Certain classes of visas (such as a “J” or “F” visa) will mean that the individual is considered a nonresident alien regardless of days of presence.
  • Closer Connection Exception: If a person is in the United States for fewer than 183 days during the calendar year and can establish that her tax home is in a foreign country (i.e., that her principal place of business or abode is located in such foreign country) for the entire taxable year and it is the country which the individual claims a closer connection, then she may claim residency in that country, despite meeting the substantial presence test. Since the tax home must be in the foreign country for the entire calendar year, the closer-connection exception generally will not apply to the arrival or departure year.

Once residency is determined, the income subject to tax by entertainer or athlete must be reported, and, if applicable, U.S. taxes paid. In most cases, for nonresidents, withholding mechanisms are in place. In some instances, withholding may exceed the liabilities, and a refund will be issued after an income tax return has been filed. 

The Withholding Rate

Generally, a payor of income from U.S. sources to a nonresident alien is a “withholding agent” and must withhold U.S. tax.To avoid overwithholding, a tax advisor should assist the foreign athlete or entertainer to determine—

  • whether a lower treaty rate may be obtained, and have the individual provide the appropriate Form W-8 to the payor, and
  • whether obtaining an agreement with the IRS is practical, and if so, applying for a central withholding agreement (CWA).

A 30 percent withholding rate is the default rate for payments to artists and athletes for services as independent contractors. Withholding is imposed at graduated rates on payments to artists and athletes for services performed as employees. If the payor is not certain of the individual’s status, withholding should be done at a rate of 30 percent of the gross payment. There are certain exceptions, under treaty or otherwise, which may reduce the amount that is required to be withheld; however, in order to obtain the benefits of these exceptions, the entertainer or athlete needs to provide the required certification to the payor in advance.

Central Withholding Agreements

Nonresident alien athletes and entertainers may apply for a CWA with the IRS in order to reduce the amount to be withheld. For a specific tour or series of events, the CWA would permit withholding based upon a budget and estimated net profits. Although Rev. Proc. 89-47 indicates a 90-day window for processing CWAs, the IRS instructions state that the IRS must receive requests for CWAs at least 45 days prior to the first event to be covered by the CWA. Effective Jan. 1, 2015, CWA personnel will look back at the past three tax years to determine if the nonresident alien has filed all required Form(s) 1040NR.

Other Considerations

Visas. Nonresident aliens wishing to work or do business in the United States must consider the immigration laws of the United States.

Taxpayer ID numbers. Nonresident aliens who are eligible to work in the United States must obtain Social Security numbers. Those who are not eligible to work but have to file U.S. returns must obtain an individual taxpayer identification number (ITIN).

State issues. As at the federal level, there are withholding requirements for states on income paid to nonresidents. Nonresident alien athletes and entertainers may apply for a CWA with certain states as well. They should keep in mind, however, that treaty positions—for residency or otherwise—are not necessarily followed by the states. Each states’ laws must be reviewed to determine residency, as well as allocation of income.


Carola Knoll, CPA, is a senior manager with the Expatriate Tax Services Group in the New York Office.  Carola has over 20 years experience in international taxation, specializing in expatriate tax and assignment services during 10 years with the Big 4.  Other areas of specialization include U.S. income withholding compliance, foreign information reporting, and planning for inbound and outbound individuals and companies.  Carola is a member of the NYSSCPA  and AICPA. She has written numerous articles for NYSSCPA publications.  She has been a speaker for the Foundation for Accounting Education on international tax topics, as well as for internal continuing professional education requirements for CPAs. Carola can be reached at cknoll@bdo.com or 212-885-8096.

 
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