Payments Subject to Withholding
The 30% withholding applies to gross income – which includes fees, as well as certain expense reimbursements that are provided to an artist. All compensation provided to the artist is subject to withholding.
For example – assume an artist’s fee for his U.S. performances is $10,000. In addition, the presenter who is hiring the artist is providing a $3,000 expense reimbursement to the artist for the performances. The total amount to be withheld from the artist’s fee is $3,900 -- $3,000 (30% of the $10,000 fee) plus $900 (30% of the $3,000 expense reimbursement).
One important exception to the 30% withholding rule is expense reimbursements that meet the requirements of the IRS's "Accountable Plan Rules." These requirements are:
- The expenses must be reasonable and must be directly related to the engagement;
- The expenses must be substantiated by the artist (i.e., artist must provide receipts); and
- The expense reimbursement must not be more than the amount of the documented expenses.
If an expense reimbursement meets these three requirements, the reimbursement should not be included in gross compensation for withholding purposes. Expenses that generally are accepted by the IRS to qualify for this type of reimbursement are hotel, travel, and meal expenses.
For a more detailed explanation of the accountable plan rules, see this IRS webpage on nonresident aliens and the accountable plan rules.
According to IRS rules, commissions paid to agents and artist managers are also subject to withholding, even if the commission is paid by a U.S. presenting organization directly to an agent or manager. This applies regardless of whether the commission is paid together with or separate from the payment to the artist.
Note that the withholding requirement applies to foreign artists performing services within the U.S. – regardless of the payer’s place of residence, where the contract for services was made, or the place of payment. U.S. arts organizations engaging foreign artists for tours outside the U.S. should note that a foreign guest artist is not taxed on services performed outside the U.S.
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 payments. The IRS has since confirmed that payers are not required to withhold on expense payments if they meet the accountable plan rules, described above.
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.
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