Bringing Canadian Musicians into the United States - Responsibilities of Withholding Agents
Author: Brad Howland
First Posted: June 22, 2008
Revised:
The summer festival season is upon us, a time when many U.S. music promoters would like to import some of our excellent Canadian musicians to play. Here's what they need to do.
Most U.S. contractors would probably pay their Canadian musicians as independent workers, rather than employees. A U.S. person or organization responsible for bringing musicians south of the border is required to act as a withholding agent, deducting 30% from the pay of each musician who is not a U.S. citizen or Resident Alien, and remitting it to the IRS. At the end of the year, the agent must file Form 1042 with the IRS to report the income and withholdings, and issue 1042-S tax slips to the Nonresident Alien musicians.
If there are U.S. citizens or Resident Aliens in the group, the agent can simply pay them the way any U.S. citizen is paid, issuing 1099-MISC slips at year-end to any individuals who received more than $600, as is normally done.
The Nonresident Alien musicians should file 1040NR income tax returns to receive a refund of all or some of the income tax withheld. Those musicians without U.S. identification numbers must apply for Individual Taxpayer Identification Numbers (ITINs) by submitting Form W-7 and applicable identification documents with their 1040NR returns. They can claim foreign tax credits on their Canadian and Quebec returns for any U.S. tax not refunded.
Exemptions from Withholding
It is possible for Nonresident Alien musicians to claim an exemption from the 30% withholding. There are three ways to go about it, each with its own challenges:
Method 1: The musicians complete and submit Form 8233 to the agent. The agent reviews the information in the form as described in the instructions for Part IV and forwards it to the IRS.
The musicians would claim an exemption on the form under Article XVI of the Canada/U.S. tax treaty, which states that, if total income from services performed in the U.S. during the year is under $15,000, the income is exempt from U.S. tax:
Article XVI
Artistes and Athletes
1. Notwithstanding the provisions of Articles XIV (Independent Personal Services) and XV (Dependent Personal Services), income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as an athlete, from his personal activities as such exercised in the other Contracting State, may be taxed in that other State, except where the amount of the gross receipts derived by such entertainer or athlete, including expenses reimbursed to him or borne on his behalf, from such activities do not exceed fifteen thousand dollars ($15,000) in the currency of that other State for the calendar year concerned. (Reference)
Now here's an interesting problem: in the instructions for the form it indicates that public entertainers such as musicians are not permitted use Form 8233 to claim an exemption–instead they must use Method 2 (below) to stake their claim. However, on its website the IRS clearly states that entertainers are allowed use Form 8233, so it is probably ok to do so:
Athletes & Entertainers
U.S. source personal service income paid to an individual athlete or entertainer is reportable on Form 1042-S for any amount in excess of zero. Withhold at 30% or lesser tax treaty rate if applicable (See Table 2 in IRS Publication 515 or 901). The beneficial owner of the income will claim the benefit of the tax treaty article that deals with "artistes, athletes or entertainers" or with "Independent Personal Services." The beneficial owner may claim the lesser tax treaty rate by filing Form 8233 with the withholding agent. The withholding agent will report the payment on Forms 1042 and 1042-S, even if the entire amount of compensation is exempt under a tax treaty. (Reference)
However, yet another hurdle for the musicians to clear is the requirement to furnish a Social Security Number or ITIN on Form 8233 when it is submitted to the agent. If they don't have a number yet, there is a work-around described in the Form 8233 instructions: 1. apply for an SSN and get rejected; 2. apply for an ITIN and provide proof of the SSN rejection. I've never fully understood how this is supposed to work, and don't actually know anybody who has pulled it off. Every musician I know visiting the U.S. to perform for the first time had to wait until their 1040NR returns were filed (as above) to get an ITIN.
Naturally, the agent would want to be fully satisfied that the exemptions were legitimate before accepting the forms on behalf of the IRS. The agent might request a U.S. itinerary from each musician that shows income earned over the year.
Method 2: The musicians can enter into a special withholding agreement with the IRS:
Central Withholding Agreements
Foreign athletes and entertainers who are making a tour of the United States may wish to enter into a "Central Withholding Agreement" with the IRS because, generally, such agreements reduce the amount of taxes withheld on the U.S.-source gross receipts of the foreign athlete or entertainer. A request for a central withholding agreement should be submitted at least 90 days before the agreement is to take effect. For additional information on obtaining a CWA, contact us at CWA.Program@irs.gov or forward your request to the address shown in the discussion found at Central Withholding Agreements. (Reference)
Method 3: There is a general exception to mandatory withholding that also applies to Nonresident Alien musicians.
IRC 861(a)(3) / IRC 864(b)(1) — Wages or Nonemployee Compensation exempt from withholding of federal income tax if all 3 of the following conditions met:
- The nonresident alien performing services is present in the U.S. for a total not exceeding 90 days in a taxable year;
- The compensation for such services does not exceed $3,000; and
- The nonresident alien performs the services as an employee of, or under contract with, a nonresident alien individual, a foreign corporation, or a foreign partnership not engaged in a trade or business in the U.S. or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation, or a U.S. partnership (including from within a U.S. possession).
IRC 872(b)(3) — Wages or Nonemployee Compensation exempt from withholding of federal income tax if both the following 2 conditions are met:
- The nonresident alien is present in the U.S. in F, J, M, or Q nonimmigrant status; and
- The compensation for services is paid by a nonresident alien individual, a foreign corporation, or a foreign partnership or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation, or a U.S. partnership (including from within a U.S. possession). (Reference)
In other words, if an agent is satisfied that each musician will spend less than 90 days in the U.S. during the year, earn less than $3,000, and is working as the employee of a foreign corporation, there is no need to withhold any tax.
In the above discussion I used the words "promoter," "contractor," and "agent" interchangeably, to refer to any U.S. person or organization who is responsible for booking and paying the Canadian musicians. I also assumed that the musicians are acting as individuals in the United States. The situation is slightly different if an ensemble is a corporation or registered Canadian charity and the musicians are working in the U.S. as employees or subcontract workers of the corporation/charity.
Visit Howland Tax Services for a quick look at the visa requirements that go hand in hand with the income tax requirements.
Related Websites
Form 1099-MISC (Informational)
http://www.irs.gov/pub/irs-pdf/f1099msc.pdf
Instructions for Form 1099-MISC
http://www.irs.gov/pub/irs-pdf/i1099msc.pdf
General Instructions for Form 1099
http://www.irs.gov/instructions/i1099gi/index.html
Federal Income Tax Withholding and Reporting on Other Kinds of U.S - Source Income Paid to Nonresident Aliens
http://www.irs.gov/businesses/small/international/article/0,,id=129241,00.html
Withholding of Tax on Payments to Foreign Athletes and Entertainers
http://www.irs.gov/businesses/small/international/article/0,,id=129240,00.html
Form 8233 - Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual
http://www.irs.gov/pub/irs-pdf/f8233.pdf
Form 8233 - Instructions
http://www.irs.gov/pub/irs-pdf/i8233.pdf
Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital
http://www.fin.gc.ca/treaties/USA_e.html