For Canadian Musicians and Athletes: Obtaining a Centralized withholding agreement
The Function of a Centralized Withholding Agreement
A Centralized Withholding Agreement (CWA) offers Canadian entertainers and athletes working in the United States (U.S) a practical method for decreasing the amount of tax withholdings on performance income earned in the U.S. Canadian athletes and musicians that are subject to the tax withholding because of performances in the United States may request a CWA to qualify for a reduced withholding rate.
There are three parties to the CWA: the performer, a third-party withholding agent, and the Internal Revenue Service(IRS). The withholding agent may be the musician’s manager, accountant, or the athlete’s agent. Each are required to come to agreement hat the athlete or musician will perform, then the withholding agent will keep a portion of the gross income that athlete or musician received from the performance and that amount will be remitted for payment to the IRS.
Withholding income of non-U.S. resident athletes and musicians serves as a security net for the IRS. By virtue of the agreement, the IRS has a guaranteed payment of any taxes due. If there is a withholding, the athlete or musician may receive a refund when filing a U.S. tax return for that calendar year which included the performance.
The Withholding Amount
Section 1441(a) of the Internal Revenue Code (“the Code”) requires that taxes be withheld on payments made to nonresident aliens for the performance of personal services. Personal services include athletic, artistic, comedic, and musical performances alike. Moreover, section 3402(a)(1) states that all employers must deduct and withhold tax upon any wages paid to employees. The rate is generally higher for performers determined to be independent contractors.
If the non-resident Canadian athlete or musician is considered to have performed personal services, them he or she will be subject to graduated rates of withholding.
If the non-resident Canadian athlete or musician is not an employee but an independent contractor, payments made are subject to a 30 % withholding rate.
Two critical and highly fact-specific analysis’ that must be made for the Canadian performers to receive the most favorable tax treatment: (1) whether the Canadian athlete or musician is a non- U.S resident for tax purposes and (2) whether the athlete or musician is considered an employee or an independent contractor, also known as a “guest artist” or “borrowed athlete.” These performers are taxed on income earned from sources within the United States even if not physically present.
This is of particular importance today in the world of social media such as Instagram. The IRS even has the authority to tax the income of Canadian athletes and musicians that is received from U.S. corporate sponsors simply for endorsing their product. If proper classification is not done, the athlete or musician risks losing hard-earned income.
Note that this rule is very near and dear to the IRS’ heart and the IRS holds firmly to the position that the 30% MUST be withheld on all payments to nonresident athletes and musicians. This strict IRS policy holds true even for those payments that one may ordinarily believe to be exempt from U.S. tax under either the Code or a bi-lateral tax treaty.
As for the employee-employer relationship, this is important because, generally, non-U.S. residents that are considered a “guest” or “borrowed athlete” are not considered employees. They do not have an “employer” that automatically withholds tax, therefore, these performers will not be exempt from the non-resident withholding requirement.
How to Obtain a Centralized Withholding Agreement
Timekeeping– The application for a CWA must be submitted to the IRS for consideration at least 45 days before the performance begins. If the IRS does not receive an application at least 45 days before the performance, the application will be denied. Note, if the group has multiple members, each non-resident alien member must submit their own. With the prospect of denial because of untimely filing, it is highly advisable that a musician or athlete submit the application for the CWA as early as possible.
The Application- IRS Form 13920 is the application for a CWA. The initial application must also include information such as the performers name who is seeking to be coverage by the CWA; the name of the withholding agent; an Individual Taxpayer Identification Number (ITIN); tour, event, or performance dates to be covered; and the expected budget of the tour, event, or performance; and the performance contract.
Also, applying for a CWA requires a ITIN or a Social Security Number (SSN). This means that Canadian athletes or musicians must first obtain an ITIN or a SSN. Usually, a person will not be granted a ITIN until he or she has applied for and been denied a SSN.
If non-U.S. resident athlete or musician has (1) worked or performed in the US in a prior tax year and (2) has not complied with tax paying and filing obligations for those years, the CWA will not be granted.
It is absolutely imperative that athletes and musicians make arrangement to file and pay taxes on past US tax returns. If the athlete or musician cannot become current with U.S. tax paying and filing obligations from years and, hence, are disallowed from applying for a CWA, they will have to accept the 30% withholding.
Properly limiting income withholding, thus, maximizing profits is a tricky maneuver. You are encouraged to contact us for additional tax guidance.