Questions and Answers from CWA Phone Forum

Q: We pay a U.S. agent for a performance by a band from another country. We have information on the non-resident alien performers, and we withhold 30 percent. We prepare Forms 1042-S for the performers. Do we also send a Form 1099 to the agent?

A: No, the U.S. agent is not the beneficial owner of the income. The Form 1042-S is the correct form for reporting the gross income paid to or for the benefit of each of the non-resident alien members of the band.

Q: During the phone forum, a question about reimbursing expenses for artists and entertainers and a letter from the IRS was mentioned. The presenters said the letter had been posted on the IRS Web site. Would you please make that available in the FAQs?

Nonresident Aliens and the Accountable Plan Rules

Q: I have a contracted athlete (from Australia) to whom we pay a contracted amount through the current tax year (2007). Is this similar to performers/artists that are paid for just a specific performance and would be subject to the 30 percent withholdings? This is my first time dealing with foreign athletes and would like some further direction.

A: Yes, the U.S. sourced income of the non-resident alien athlete is subject to 30 percent withholding on gross earnings unless the individual is your employee. If the individual is not your employee, you withhold 30 percent of gross and remit to the US Treasury. You report the income and withholdings to the individual at the end of the year on Form 1042-S. If the individual is your employee, you would withhold income tax at graduated rates as well as withholding FICA. For more information please see Publication 15, Circular E, Employers Tax Guide (PDF).

The non-employee athlete may want to request a Central Withholding Agreement (CWA) to avoid over-withholding.

Q: The CWA agreement states that exhibit A lists the venues ... what if we are not listed? (Sometimes impromptu performances for a small audience within the department occur.) Should we withhold 30 percent or is it best to contact CWA?

A: If an athlete or entertainer has a CWA and your venue is not listed on the Attachment A; that performance is not covered by the CWA and you should withhold 30 percent of the gross income paid to or for the benefit of the NRA. If the performance date has been added since the CWA was enacted, it is the responsibility of the designated withholding agent to inform the IRS and adjust the CWA accordingly.

Q: It was mentioned that Form 8233 is the appropriate mechanism for collecting identification information from an individual nonresident alien performer for the purpose of creating a record to report Code 20-type income (earnings as an artist or athlete) and tax withholding via Form 1042-S at year-end. Why would Form 8233 be preferred over Form W-8BEN in this instance? Is it wrong to collect Form W-8BEN (instead of Form 8233) from an individual NRA artist, as long as the 30 percent income tax withholding occurs? Will the IRS be updating instructions to Form W-8BEN and Form 8233 accordingly?

A: If the NRA is not requesting an exemption from withholding, you may solicit the beneficial owner information on W-8BEN, part 1. If the individual is requesting an exemption from withholding, the instructions for Form W-8BEN states that you should not use W-8BEN if:

You are a nonresident alien individual who claims exemption from withholding on compensation for independent or dependent personal services performed in the United States. Instead, provide Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, or Form W-4, Employees Withholding Allowance Certificate.

Q: Is it true that an NRA performer from a country with an Athlete/Entertainer treaty article (such as United Kingdom) would submit Form 8233 with his tax return at year-end to claim the treaty exemption if the person indeed earned less than the treaty maximum? Why submit Form 8233 with his tax return, when he could claim the exemption directly via Form 1040NR? Why submit Form 8233 as support when the individual has attached Form(s) 1042-S reporting income Code 20 earnings (and income tax withholding)?

A: The current revision of instructions for Form 1040NR, Page 30, reads;
If you are claiming tax treaty benefits and you failed to submit adequate documentation to a withholding agent, you must attach all information that otherwise would have been required on the withholding document (for example, all information required on Form W-8BEN or Form 8233).

So while the NRA is not required to submit the Form 8233 with his income tax return, he is required to provide the information from the Form 8233 (e.g., treaty country, treaty article, etc.).

Q: Does the Central Withholding Agreement only apply to individual performers?

A: Yes, only individual non-resident alien athletes and entertainers may apply for a CWA. The group may have multiple athletes or entertainers who are eligible for a CWA; but each must make an individual application.

Q: Typically, how long is the process from start to finish for an entity acquiring a Central Withholding Agreement?

A: We ask that the applicant apply for a CWA 45 days before the start of a tour or event to have adequate time to process all of the information documents and obtain all required signatures on a CWA. Applications submitted with less than 45 days before the start of the tour or event will be considered on a case by case basis.

Q: A performer enters the U.S. in B-1 status and does a performance for students and the public at an academic institution; there are no ticket sales. The performer meets the 9/5/6 rules. Can the performer receive an honorarium? If yes, what treaty article is used the one for independent services or the one for artistes and athletes? Does the artistes and athletes article only apply to P and O status or could it also apply to B status? How does the answer change if the individual enters the U.S. in B-2 status?

A: The CWA program generally works with athletes and entertainers who are working in the US with either a P or an O nonimmigrant work authorization; however, there is no legal prohibition against entering into a CWA with an NRA athlete or entertainer who has entered into the U.S. on a B-1 or B-2 visa, or on a visa waiver.

Q: Would an individual on a lecture tour qualify for a CWA, or are CWAs strictly limited to performing artists and athletes?

A: CWAs are currently restricted to athletes and entertainers.

Q: Are CWAs limited to individuals within specific immigration statuses (i.e., P-3), or can they be issued for B-1s and other statuses that allow compensatory payments in certain circumstances?

A: The CWA program is designed for foreign athletes or entertainers who earn income from their performances in the U.S. A CWA is not denied to an alien solely because he entered the U.S. on a visa other than a P or O visa. See the answer to question above.

Q: An agent is paid $4,000 for four entertainers, one of whom is a non-resident alien. We have no idea how much each entertainer is receiving, so we assume each. We gross up $1,000 to get the required withholding. The NRA will receive a 1042-S at year-end but how do we report the rest of the payment? Does the agent get a 1099 for $3,000?

A: You should report the payment of $3,000 made to the U.S. agent on Form 1099-MISC, unless the U.S. agent is a corporation, in which case there is no Form 1099 reporting requirement.

Disallowing Application of Accountable Plan to 1042S Payments

In a recent IRS forum on CWAs with artists, athletes and entertainers with IRS representatives, the IRS raised questions on whether payers can offset reimbursed business expenses from withholdable and reportable 1042S payments even though paid under terms of an accountable plan and in line with what appears to be an authorizing statement in IRS Pub. 515, p. 24. Articles in treaties covering artists, athletes and entertainers speak in terms of gross receipts which may not leave room for expense reimbursement offset. The IRS did say they would further validate this response.

If you pay or reimburse the travel and lodging expenses of a nonresident alien, the payments are not reportable to the IRS and are not subject to NRA withholding if the payments are made under an accountable plan as described in section 1.62-2 of the income tax regulations. This treatment applies only to that portion of a payment that represents the payment of travel and lodging expenses and not to the portion that represents compensation for independent personal services.

With respect to income tax treaties, the actual language of each individual treaty determines whether travel and lodging reimbursements are excluded in determining the gross income threshold for treaty allowances. If the treaty language is silent on the question, then assume that the travel and lodging reimbursements paid to an NRA under an accountable plan are not includible in the gross income limits of the treaty language, since these reimbursements are not considered to be gross income under U.S. law.

Inclusion in 1042 Withholding Base of Proceeds from Sales of T-shirts, CDs, etc. During a Concert or Other Performance Venue

In line with the same gross receipts understanding, it was noted during the forum that proceeds from sales of CDs, T-shirts and other items during a concert or entertainment venue were also part of the 1042 withholding base if part of the gross receipts are from the venue. It was the IRS position that this was the case even though Reg. Sec. 1.1441- 2(b)(2)(i) exempts all gains derived from the sale of property (except gains relating to certain sales of timber, coal, or domestic iron ore or gains subject to contingent payment rules regarding sales of patents, copyrights, or other intangible property). We understand that the 1441 withholding base is defined differently from the Form 1040NR base and that terms of gross receipts is a Form 1040 concept and not a 1042S concept. See also instructions to 1042S and income codings and Pub. 515, p.27 which speaks in terms of payments for independent contractors i.e., fees.

When the merchandise of the NRA athlete or entertainer is sold at the venue in conjunction with the sporting or entertainment event, the sale can be closely approximated to the event and is characterized as ordinary income subject to withholding of 30 percent of gross rather than merchandise sold in a store or on the internet which is not closely approximated to a specific event and would be classified as royalty income and subject to the withholding rates for royalty income.

Disallowance of W-9 from Agents where Known Artists are NRAs

Q: During the presentation it was noted that an NRA athlete or entertainer is subject to 30 percent withholding from gross income, that is, 30 percent of settlement amount from venue, and that withholding applies even on funds that potentially belong to others, i.e. promoter, agent, manager. Form W-9 is to be disregarded if the payments include payments to the NRA. What do you do if the W-9 supplier says no funds are paid to NRA? Expressly when do you disregard a W-9?

A: If the ticket sales are for the appearance or performance of a NRA athlete or entertainer, the gross income is considered to be paid to, or for the benefit of, the NRA athlete or entertainer; and the promoter or other person receiving the money is an agent of the NRA athlete or entertainer. If the NRA athlete or entertainer wishes to have tax withheld at graduated rates on only the net income of the NRA athlete or entertainer, they may apply for a Central Withholding Agreement.

Requirement that Form 8233 be expressly accepted by IRS before it can be honored

Q: It was indicated that you are to receive a notice of acceptance back from the IRS on submission of a Form 8233 when involving an artist, athlete or entertainer even though the general 8233 rule (see form instructions) is that the IRS responds only if they reject the form and must respond before 10 days from your filing otherwise their reject is prospective only. Can you please validate this response?

Instructions for Form 8233 state that the withholding agent must submit the Form 8233 within five days of receipt from the income recipient. The withholding agent must then wait 10 days before making any payment to the income recipient. The Form 8233 must have a SSN or ITIN of the recipient when submitted to the service. If the withholding agent has filed a completed Form 8233 to the service and has not heard back within the 10 day window; the agent can make the presumptive determination that the Form 8233 has been accepted by the service.

Reg. 1.1441-1(b)(2)(ii) says: A withholding agent making a payment to a U.S. person ...and who has actual knowledge that the U.S. person receives the payment as an agent of a foreign person must treat the payment as made to the foreign person.

Reg. 1.441-1(b)(3)(iii) says: A payment that the withholding agent cannot reliably associate with documentation is presumed to be made to a U.S. person, except as otherwise provided...

Situation:

• We are paying an agent for a performance by an individual;
• We know the performer is from a foreign country but we have no documentation from the performer;
• We have a W-9 from the agent stating that they are a U.S. person, and we have no reason to think the W-9 is unreliable;
• We have nothing that tells us whether the agent is treating the performer as an employee or contract laborer.

Q: We may know that the performer is associated with a foreign country, but without documentation, how can we have actual knowledge that the performer is a foreign person? There are many U.S. citizens living in foreign countries?

A: The term actual knowledge refers to personal knowledge that an athlete or entertainer is a nonresident alien, and thus a foreign person. In the absence of actual knowledge, you may rely upon documents from or about the athlete or entertainer which indicate he is a U.S. person or a foreign person. In the absence of actual knowledge or documents, you may rely upon a withholding certificate provided by the athlete or entertainer (i.e., Form W-9, 8233, or one of the W-8 Forms). In the absence of actual knowledge, documents, or a withholding certificate, you must fall back upon the presumption rules. Under the presumption rules, you will assume that the beneficial owner of the income is a U.S. person subject to Form 1099 reporting unless one of the exceptions applies which are listed at Treas. Reg. 1.1441-1(b)(3)(iii) et. seq.)

Q: Under the presumption rules, would we not be required to presume the performer is a U.S. person?

A: You can rely on information that a prudent person would rely on. The presumption rules do not allow you to disregard the NRA status of the true beneficial owner of the income because you are making the payment to a US entity unless the NRA is an employee of the entity in a true employer/employee relationship. Under Treasury Regulation 1.1441-1(b)(2)(ii), a withholding agent making a payment to a U.S. person who has actual knowledge that the U.S. person receives the payment as an agent of a foreign person must treat the payment as made to the foreign person.

Q: When we get a contract from an agent for a performer, are we required to find out whether the performer is being treated as an employee or contract laborer by the agent?

A: If the performer is an NRA, you are a withholding agent and it is your responsibility to withhold 30 percent when the individual is performing independent personal services. A fairly good rule of thumb is to look at who is the ticket purchaser buying the ticket to see; the performer or a performance. In most cases, if the ticket promises a specific named person will appear, that person has some share of the profit or loss and is acting in an independent capacity regardless of the structure of the entity.

Q: Are we required to request a W-9 or W-8 from all performers represented by agents?

A: If you are making a payment to or for the benefit of an individual you should have a Form W-8, Form 8233 or Form W-9 for the individual you are paying for personal services. When you make payment to an agent of an NRA athlete or entertainer you are actually making the payment for the personal services of the NRA athlete or entertainer and you should have the appropriate documentation of the individual (name, SSN or ITIN, country of residence and address to send Form 1042-S at the end of the year).