30% U.S. tax on international payments above US$600/year??
Thread poster: Miguel Fuentes

Miguel Fuentes  Identity Verified
Mexico
Local time: 13:22
Member
English to Spanish
+ ...
Mar 15, 2013

Dear fellows,
A US Client told to me that, according to tax law (not clear if State or Federal) they can no longer pay more than US$600 per year to any individual vendor without incurring into a 30% tax for international payments for every dollar over $600.
I sent a W-8 form filled the best I understood it, but the accountant apparently feels the $600/year cap does not change regardless of the W-8 tax form.
Apparently the only solution their accountant can think for the $600 tax cap is that I should open a bank account in the US where they can deposit my payments without limitation.

My annual billing to several individual clients in the US is much larger than US$600 and none of them have so far mentioned the existence of such a tax cap. I don't think they would ever agree to pay a 30% tax without even telling me about the issue (or recurring to several translators and keep their bills under the supposed $600 cap).

1. Have your own US clients told you anything along these lines?
2. Could you suggest a solution?
3. Or direct me to a source of solid information on fed (or state) taxes for intl vendors?



Thanks in advance and my best to all of you!


Miguel


 

Sheila Wilson  Identity Verified
Spain
Local time: 19:22
Member (2007)
English
+ ...
Rubbish! Mar 15, 2013

Mike Fuentes wrote:
1. Have your own US clients told you anything along these lines?

Absolutely not. I have a client who's paid me more than that this year already - into 4 figures.
2. Could you suggest a solution?

Suggest to the client that they get a new tax advisor
Apparently the only solution their accountant can think for the $600 tax cap is that I should open a bank account in the US where they can deposit my payments without limitation.

If you don't live in the US, and never visit there, I doubt that you'll be able to open an account there. You'd certainly find that very hard in Europe nowadays. Money laundering has stopped all that. No, the W-8 is there specifically to deal with this situation.

However, I have to say that I know next to nothing about tax matters or the U.S. I just know that my clients aren't saying that at all.


 

Kaiya J. Diannen  Identity Verified
Australia
Member (2008)
German to English
Seems to be a HUGE error Mar 15, 2013

In a quick glance at the "literature" from the IRS, I can find nothing similar to what your client describes.

Yes, income paid to certain "foreign persons" is subject to 30% withholding tax in certain situations.
No, this doesn't apply to your situation, or indeed to most situations, as it doesn't apply in almost every instance where there is a tax treaty with the country in which the "foreign person" has their residence, and it shouldn't apply at all if the work ("independent personal services") is NOT PERFORMED IN THE UNITED STATES.

You need to get THEM to quote you CHAPTER AND VERSE where they are getting this so-called new rule from.
- - - - -

See in particular Publication 515:
http://www.irs.gov/pub/irs-pdf/p515.pdf

also this:
http://taxmap.ntis.gov/taxmap/pubs/p515-011.htm

The United States has income tax treaties (or conventions) with a number of foreign countries under which residents (sometimes limited to citizens) of those countries are taxed at a reduced rate or are exempt from U.S. income taxes on certain income received from within the United States.
Income that is exempt under a treaty is not subject to withholding at source under the statutory rules discussed in this publication.

also this:
http://www.admin-fin.gatech.edu/business/purchasing/050035.html

Federal Tax Treatment

All payments made to nonresident aliens related to honoraria and to services performed in the United States must be reported to the Internal Revenue Service. All nonresident alien individuals receiving payments for services or unsubstantiated reimbursable expenses must have a Social Security Number (SSN) or Tax ID Number. If services are not performed in the United States, have the individual complete IRS Form W-8BEN or similar statement certifying foreign status and attach documentation that services were performed outside the United States as these payments do not require federal tax withholding or reporting.

This may be most applicable to you:
http://www.irs.gov/pub/irs-trty/mexico.pdf

ARTICLE 14
Independent Personal Services
1. Income derived by an individual who is a resident of a Contracting State from the performance of personal services or other activities of a similar nature in an independent capacity shall be taxable only in that State, unless:
a) such resident has a fixed base in the other Contracting State which he regularly makes use of in the course of performing his activities; in such case, the other State may tax the income from services performed in that other State which is attributable to that fixed base; or
b) the resident is present in the other Contracting State for a period or periods exceeding in the aggregate 183 days within a 12 month period; in such case, the other State may tax the income attributable to activities performed in that other State.
2. The term “personal services” includes especially independent scientific, literary or artistic activities, educational or teaching activities, as well as independent activities of physicians, lawyers, engineers, architects, dentists and accountants.


 

Miguel Fuentes  Identity Verified
Mexico
Local time: 13:22
Member
English to Spanish
+ ...
TOPIC STARTER
What if it has to do with my invoices? Mar 15, 2013

This looked very strange to me also, but they seem so sure about it that I thought taking the subject to this forum.

On the other hand, I think this may haveto do with the fact that my bills are simple receipts without tax breakdown.

If I would submit receipts showing tax breakdown, then they might feel safer... Having some tax payment to show on their statement to the IRS.

Thanks for the references! ;D


 

Miguel Fuentes  Identity Verified
Mexico
Local time: 13:22
Member
English to Spanish
+ ...
TOPIC STARTER
Thanks! Could you tell me to whom, and under which situations this tax provision Does apply? Mar 15, 2013

To your comment: "Yes, income paid to certain "foreign persons" is subject to 30% withholding tax in certain situations."


[Editado a las 2013-03-15 19:47 GMT]

Sorry, I am trying to quote this line from Janet's answer but I keep goofing around with the Edit button, can't get it right anyway hehe.

[Editado a las 2013-03-15 19:49 GMT]


 

Katalin Horváth McClure  Identity Verified
United States
Local time: 14:22
Member (2002)
English to Hungarian
+ ...
Exemption under income tax treaty Mar 15, 2013

This whole issue has nothing to do with your invoices. It is about income tax, that has no business being included on invoices - and you wouldn't know it anyway.

The accountant of the client is confused. The $600 threshold is for them, above that amount they have to report it to the IRS by issuing a Form-1099. However, this does not apply to you.

If you are not a US resident, not even for tax purposes, and you are a resident of a country that has a tax treaty with the US, then you can claim exemption from Form-1099 reporting and also from withholding. That is what the W-8BEn form is for.

In the IRS publication (Publication 515, 2013) that Janet linked in a few posts ago, it is clearly described:
http://www.irs.gov/pub/irs-pdf/p515.pdf
Page 7, right-side column, bottom half:
"Form W-8BEN, Certificate of Foreign Status
of Beneficial Owner for United States Tax
Withholding.
This form is used by a foreign
person to:
- Establish foreign status;
- Claim that such person is the beneficial
owner of the income for which the form is
being furnished or a partner in a partner­
ship subject to section 1446 withholding;
and
-If applicable, claim a reduced rate of, or
exemption from, withholding under an in­
come tax treaty."

If you filled in the W-8BEN correctly, that should be sufficient, assuming Mexico has a tax treaty with the US.
Are you sure it was a W-8BEN that you filled, and that you checked the correct boxes and specified the tax treaty with Mexico?
Katalin

[Edited at 2013-03-15 20:58 GMT]


 

Miguel Fuentes  Identity Verified
Mexico
Local time: 13:22
Member
English to Spanish
+ ...
TOPIC STARTER
Thanks Katalin... Mar 15, 2013

I filled the W-8 BEN the best way I understood, and yes, Mexico does have a current tax treaty with the US, that much I am positive.

I'd like to see their faces when I tell them about the confusion and that the 600 limit applied to them.

Thanks! ;D


 

OlafK
United Kingdom
Local time: 19:22
English to German
+ ...
in certain situations Mar 17, 2013

I have an American client and this doesn't apply to my regular translation fee, that's taxed over here in the UK. In your case it would be the same. You pay tax in the country where you live and work. But if you generate income within the US you'll have to pay 30% (or rather your client has to withhold 30% unless you full in a W-8 BEN for which you need an ITIN from the IRS ....). That's the case for example if you translate a book which is sold in the US and you earn royalties from those American sales.

 

Nicole Schnell  Identity Verified
United States
Local time: 11:22
English to German
+ ...
As an outsourcer based in the US Mar 17, 2013

A few years ago we received a notification from our CPA that from now on we have to notify the IRS about any amounts exceeding $600 paid to foreign contractors by January 26th or so, and prior to our regular, national tax filing day in April. That's why we send out those W-8BEN forms that will never be sent to the IRS anyway but we are required to collect them or they will smash our kneecaps or so. That's all. It does not change anything on tax rates. You pay your taxes in your country, we pay our taxes in our country. Nothing has changed.

 

Katalin Horváth McClure  Identity Verified
United States
Local time: 14:22
Member (2002)
English to Hungarian
+ ...
You don't have to have a US tax ID for the W-8BEN Mar 18, 2013

OlafK wrote:

But if you generate income within the US you'll have to pay 30% (or rather your client has to withhold 30% unless you full in a W-8 BEN for which you need an ITIN from the IRS ....).


My understanding is that you don't need a tax identification number (TIN). The only difference is that if you have one, then the W-8BEN is valid forever, if you don't fill in that box, it is only valid for 3 years.

http://www.irs.gov/instructions/iw8/ch01.html#d0e382
Form W-8BEN

Generally, a Form W-8BEN provided without a U.S. TIN will remain in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN signed on September 30, 2006, remains valid through December 31, 2009. A Form W-8BEN with a U.S. TIN will remain in effect until a change of circumstances makes any information on the form incorrect, provided that the withholding agent reports on Form 1042-S at least one payment annually to the beneficial owner.


 

Miguel Fuentes  Identity Verified
Mexico
Local time: 13:22
Member
English to Spanish
+ ...
TOPIC STARTER
Thank you Katalin ;D Mar 18, 2013

Katalin Horváth McClure wrote:

OlafK wrote:

But if you generate income within the US you'll have to pay 30% (or rather your client has to withhold 30% unless you full in a W-8 BEN for which you need an ITIN from the IRS ....).


My understanding is that you don't need a tax identification number (TIN). The only difference is that if you have one, then the W-8BEN is valid forever, if you don't fill in that box, it is only valid for 3 years.

http://www.irs.gov/instructions/iw8/ch01.html#d0e382
Form W-8BEN

Generally, a Form W-8BEN provided without a U.S. TIN will remain in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN signed on September 30, 2006, remains valid through December 31, 2009. A Form W-8BEN with a U.S. TIN will remain in effect until a change of circumstances makes any information on the form incorrect, provided that the withholding agent reports on Form 1042-S at least one payment annually to the beneficial owner.


 

Elizabeth Nenque  Identity Verified
United States
Local time: 11:22
Spanish to English
Addressing the 30% tax confusion Apr 6, 2015

So, I have done a lot of research on this question and The IRS has lots of information that can be confusing. The issue has to do with Personal Services Income and whether that income is US-source Income vs. Foreign-source Income.

There are several types of income sources. I think Personal Services is easily understood by what it is not (personal services income is not generated from Dividends, rents, royalties, patents, copyrights, pensions due to personal services, scholarships and fellowships. (see http://www.nd.gov/spo/connectnd/1099-information/irs-def.pdf)

So if a US-based company contracts you for personal services of translation work, and you (individual, contractor, non-US person) perform the work wholly outside of the United States, your income is said to be Foreign Source Income.

If you perform that work wholly or in part within the United States, the income that corresponds to the part of the work done in the United States is known as US-source income and may be subject to withholding. Usually the withholding is about 30%, depending on any existing tax treaties.

The best way for you (individual, contractor, non-US person) and the U.S.-based hiring company to protect yourselves from the IRS withholding is to make sure the U.S.-based hiring company has a W8 Form on file. As I understand it there are two (2) forms that are relevant to the translation industry in general: W8-BEN (for individuals) and W8-BEN-E (for entities). This form allows you to officially declare yourself as a foreign-person residing and working outside of the United States and its territories. The U.S.-based hiring company does not have to file this form with the IRS, simply keep it on file just in case.

In the past, pre-2001, U.S.-based hiring companies needed to file a Form 1042-S for every non-US Person they contracted, but because that could be too burdensome, these companies are no longer required to file this form, if they choose not to. (see http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Source-Income---Form-1042-S-Reporting-Not-Required)

Here is a good non-technical reference about the W8 forms that I believe is easy to understand:
International Tax Blog (written Andrew Mitchell & Ryan Dunn, Attorney's at Law)
http://intltax.typepad.com/intltax_blog/2012/10/form-1099-for-payments-to-foreign-contractors-for-services.html

Other IRS.gov information.

Given this information below, it seems that a withholding agent (usually a U.S.-based translation agency) may have to withhold 30% depending on which country the contractor (translator) is based out of. Because it depends on the types of treaties set up with the U.S.

Here is the direct quote, and here is where a person might become confused, especially if they do not understand, Personal Services Income and U.S. Based Income vs. Foreign Based Income, and especially if they have not done a little more research.


Withholding on Income from U.S. Sources
1. What is the purpose of the Form W-8 BEN?

Foreign persons are generally subject to U.S. withholding tax at a 30% rate on the gross amount of certain income they receive from U.S. sources. By providing a completed Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding (PDF), to the U.S. payer (also known as the U.S. withholding agent) before or at the time income is paid or credited, you are:

Establishing that you are not a U.S. person,
Claiming that you are the beneficial owner of the income for which Form W-8BEN is being provided, and
If applicable, claiming a reduced rate of, or exemption from, withholding as a resident of a foreign country with which the United States has an income tax treaty. In order to claim a reduced rate or exemption from tax under an income tax treaty, the Form W-8BEN must include a valid U.S. taxpayer identification number.

The completed Form W-8BEN is provided to the U.S. payer (also known as the U.S. withholding agent) before or at the time income is paid or credited. This form is not filed with the U.S. Internal Revenue Service. For additional information, please refer to the Instructions for Form W-8BEN.

Source: http://www.irs.gov/Individuals/International-Taxpayers/Frequently-Asked-Questions-About-International-Individual-Tax-Matters#WithholdingonIncome



I hope this clarifies the matter many people now and in the future.

[Edited at 2015-04-06 20:47 GMT]

[Edited at 2015-04-06 20:47 GMT]

[Edited at 2015-04-06 20:49 GMT]


 


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30% U.S. tax on international payments above US$600/year??

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