Central Withholding Agreements for Foreign Athletes and Entertainers on B-2, P-1, and O-1 visas
Our Central Withholding Agreement Practice makes a great difference for both our foreign athlete and entertainment clients. Negotiating a Central Holding Agreement with the Internal Revenue Service (“IRS”) can be the difference between tens and hundreds of thousands in dollars of savings cash flow benefits in taxation from paying the default 30% rate charged to many foreign nationals with O-1 and P-1 visas. Furthermore, there is an automatic hold placed on refunds of over $5,000 that can take over a year to be funded to foreign athletes and entertainers.
Understanding how Central Withholding Agreements work within the United States taxation system is an essential piece to financial health.
United States Taxation for Foreign Athletes and Entertainers
Taxation from the Internal Revenue Service (“IRS”) is a major issue for foreign athletes and entertainers under contractor status. The majority of international professional athletes and entertainers in the United States are indeed considered contractors and subject to 30% taxation withholding for gross income earned in the United States. At our law firm, we consistently receive tax inquiries about how entertainers and athletes can do smart business and safely limit their tax exposure in 2020 and beyond, and also improve cash flow when compared to the traditional manner of submitting tax returns.
How is US tax ithheld for Foreign Athletes and Entertainers?
In general, US tax policy forces the hand of a withholding agent, who is usually the promoter of the event or a manager for the foreign national, because tax rules dictate for the IRS to enforce the tax not paid on the withholding agent if not paid. For this reason, foreign athletes and entertainers who are not in the following two categories will almost certainly have to pay the 30% withholding, unless they plan ahead:
US citizens
Permanent residence holders who meet the Substantial Presence Test
Examples of withholding agents that comply with the 30% rule include the following organizations:
The Ultimate Fighting Championships policy is to automatically withhold 30% from fight purses for US taxes only (when fights occur in the USA). They automatically withhold foreign taxes on behalf of the foreign government when taxes occur there.
Major boxing promotions such as Top Rank Inc.
Major tours such as the PGA Tour automatically withhold taxes from athletes unless the athletes have a social security number and other exemptions in certain circumstances.
What about Income Tax in the International Athlete/Entertainer’s Home Country?
Foreign national entertainers and athletes could be still subject to additional income tax on revenue earned in the United States in their home country. The two most common ways to alleviate this tax burden are to either leave the tax system of the foreign country or attempt to recover taxes paid from the United States tax burden. Leaving the tax system of a foreign national’s home taxation system depends on if there is an existing tax treaty between that country and the United States.
Some countries have a tax treaty with the United States that governs the process and amounts of tax to be withheld from each country in situations where revenue is earned in the United States. In certain circumstances and countries, there may be ways to opt-out of the tax treaty if the results are not favorable. Please note that the home country for tax purposes is most often the permanent residence of the foreign national but can also be a permanent home where the foreign national has their center of vital interest.
If the foreign national is in a country that does not have a tax treaty with the United States then local rules will apply for taxation purposes. The best practice is to contact a reputable accounting firm in the home country that can give the best advice. It is common for either an application to exit the home country’s taxation system or for the foreign national to have to pay an additional income tax return for a year after they leave if no exit filing is made.
How Central Withholding Agreements Help Foreign Entertainers and Athletes Save on US Taxes
Central Withholding Agreements help athletes and entertainers pay taxes on the NET revenue from competitions, performances, sponsorships, pay-per-view, and other forms of monetization instead of the gross income. This can be a major difference when properly articulated to the IRS of how much money goes into the athlete’s competition or the entertainer’s performance. For example, championship level boxers and mixed martial artists can spend hundreds of thousands of dollars in preparation for title defenses on training partners, accommodation, self-promotion, travel, coaches, and medical attention before competing. All of these expenses can be negotiated into a Central Withholding Agreement to ease the payment of 30% withholding on the event required by Internal Revenue Code Section 1441.
The Central Withholding Agreement requires that the source of revenue agree to pay the United States Department of Treasury on behalf of the foreign national. Typically, the source of revenue for IRS purposes is the promoter of the competition, the booking agent for performances, or any other person who has control over the receipt and custody of payment (such as a manager or agent). Our partners for these agreements take the responsibility of making sure that the payments are made so that there is maximum efficiency and compliance.
Timing is essential for using the Central Withholding Agreement. The agreement must be in place at least 45 days prior to the event. Our law firm and CPA partners will need time before that to make an inventory of our client’s expenses and negotiate the best Central Withholding Agreement possible. Finally, our CPA partners will file Internal Revenue Service forms 1042 and 1042-S to properly report income that was subject to the Central Withholding Agreement for the year.
To get started with a Central Withholding Agreement Program, please fill out the intake form below.