Professional Services paid to Canadian Citizen

[Lee B]

I just finished a tax planning session with one of my clients who is an author.

While asking about her expenses and what constituted Professional Services,

I found out that since she has switched this year to self publishing, she is now making

payments to 5 different individuals who provide various kinds of publishing services,

one of whom is a Canadian citizen living and working in Canada. Does anyone know

what the rules are for reporting the payments to the Canadian citizen. Of course the

payments to the other 4 need to be reported on Form 1099.

Thanks,

[Guest Taxed]

I believe there is a form similar to the 1099 form to report and withold the mandatory 30% for payments made to non resident aliens. Check if this applies.

http://www.irs.gov/pub/irs-pdf/f1042s.pdf

[Mr. Pencil]

a Canadian citizen living and working in Canada

According to Table 2-1 in Pub 519, personal services are sourced to where the services are performed. Therefore this would not be taxable as U.S. income, and doesn't require either a 1099 or withholding (assuming the worker is a nonresident alien).

[easytax]

I believe there is a form similar to the 1099 form to report and withold the mandatory 30% for payments made to non resident aliens. Check if this applies.

http://www.irs.gov/pub/irs-pdf/f1042s.pdf

According to Table 2-1 in Pub 519, personal services are sourced to where the services are performed. Therefore this would not be taxable as U.S. income, and doesn't require either a 1099 or withholding (assuming the worker is a nonresident alien).

I can see facts for both ---- and can't disagree as I don't have the knowledge right now BUT do have a few questions (how I learn);

All are from reviewing MTG sections:

S/ 2427 defines source income S/ 2429 Connects income with US Trade and/or business S/ 2455 Withholding requirements on NR, etc.

2427 Yes, source income here is directed to Canada --- but would this not be ---- if an employee, etc. ? (see 2429) (Pub 519 (2012) pg. 12 table 2-1 - Salaries, wages, other compensation)

2429 Would this direct a business presence here under this section and if so, would that not make withholding mandatory? (Pub 519 (2012) pg. 17 -

Trade or Business in the United States ); (see 2429) (Pub 519 (2012) pg. 12 table 2-1 - Business Income / Personal Services)

2455 Doesn't this make the payer - responsible to withhold and send the 1042-S as mentioned earlier by Taxes?

Again, I'm asking so I learn and I don't normally do any NR or have anyone working with someone outside states ----- BUT ----- given the Internet, can see where this might come up for businesses and people getting things like this done as more and more things are going basically virtual work-places ---- so take out the Canada aspect and think Australia, China, etc. as this would/could affect all (maybe).

[kcjenkins]

Please do NOT take this as authoritative, I'm not very up to date in this area, BUT I would tend to look at this as protecting my client, to file the 1042, for the US citizen. Then, if the Canadian does qualify to treat it as non-taxable by the US, he can file for a refund of the withheld amount. That is not your client's problem. As long as the client is protected, you did your job. Your client should not have to determine the vendor's status.

[Mr. Pencil]

Your client should not have to determine the vendor's status.

Sounds reasonable. Even wise. If it turns out the vendor is subject to tax, the client would be personally liable for it. I haven't faced the situation yet, but I'm sure it will come around. I may just tell the client that if they want to play IRS games about moving American jobs to foreign countries, go get an international lawyer.

[MsTabbyKats]

Does the Canadian have an American social security number? If not, how can he file a 1042?

IMHO.....your client doesn't need to do anything for the Canadian. It's the Canadian's responsibility to do whatever.

If an American gets paid by a foreigner, the foreigner doesn't report that payment to his own government. But the American is supposed to include it on his tax return.

[easytax]

Does the Canadian have an American social security number? If not, how can he file a 1042?

IMHO.....your client doesn't need to do anything for the Canadian. It's the Canadian's responsibility to do whatever.

If an American gets paid by a foreigner, the foreigner doesn't report that payment to his own government. But the American is supposed to include it on his tax return.

Please do NOT take this as authoritative, I'm not very up to date in this area, BUT I would tend to look at this as protecting my client, to file the 1042, for the US citizen. Then, if the Canadian does qualify to treat it as non-taxable by the US, he can file for a refund of the withheld amount. That is not your client's problem. As long as the client is protected, you did your job. Your client should not have to determine the vendor's status.

Sounds reasonable. Even wise. If it turns out the vendor is subject to tax, the client would be personally liable for it. I haven't faced the situation yet, but I'm sure it will come around. I may just tell the client that if they want to play IRS games about moving American jobs to foreign countries, go get an international lawyer.

The 1042 is for the U.S. person or business to file with the IRS (there is a place for the number of the recipient - NR - but is NOT actually required if the filer doesn't have it). Under MTG 2455 the U.S. payer is responsible if the IRS decides the NR should have been withheld (therefore, withhold, pay to IRS with the 1042 and be safe). The NR will need to figure out what to do with the IRS. Only negative here is the NR may raise rates to offset taxes withheld BUT THAT is a business decision between the parties ---- that doesn't leave the U.S. client in trouble for "not withholding"

Thanks for the additional input and yes, I agree, I'd lean toward protecting the "Client" and letting the NR decide to file with the U.S. or not.

Thanks.

[Guest Taxed]

It is not just USA, many other countries have tax laws that require witholding of a certain percentage as tax from any payments made to a foreign entity. The reason being that until a return is filed to get a refund the tax authorities do not know if the transaction was taxable or exempt. So if the payer fails to withold, and it is a taxable transaction and the tax authorities can't get the tax from the recipient, the payer is on the hook!