Tag Archives: taxes

income tax filing

Income Tax Filing for Canadian Musicians – T1 Tax Return Revised

Pour voir cet article en français, cliquez ici.

by Norman Slongo, Member of Local 591 (Thunder Bay, ON)

The Canadian Revenue Agency (CRA) has revised the Tl tax return for tax year 2019. The following are some highlights for musicians who prepare their own tax returns.

Employed Musicians

As an employee you are limited as to what you can claim for expenses. The deductible expenses you may claim are:

  • Maintenance costs—repairs and supplies such as strings
  • Rental fees
  • Insurance costs
  • Capital cost allowance (if you own the instrument}

To claim the expenses, you must use the musical instrument expenses line (1776} and the Capital cost allowance for musical instruments line (1777} of form T777, Statement of Employment Expenses. Should you also perform as a self-employed musician, then you must divide your expenses among the different uses. To see how this is reported see Self-employed Musicians.

Self-employed Musicians

As a self-employed performer, you will complete the T2125 form Statement of Business or Professional Activities. In Part 7 of this form, you can claim business-use-of-home expenses. This applies only to the area used exclusively as your office/work area related to your earnings as a musician. Vehicle expenses are calculated separately on Chart A of the T2125 form.

GST/HST

Should your gross income reach $30,000 in the year, you are required to register for a GST /HST account and must start charging the purchaser the necessary tax. Some provinces have HST which is a combination of provincial and federal sales.

Normal Slongo is a tax specialist and owner of Slongo Accounting and Tax Service in Thunder Bay, ON. His guest column is provided for informational purposes only, not as a substitute for advice from your personal tax professional.

tax tips

Tax Tips for American Musicians

By Glenn Franke

Editor’s note: An edited version of this article was published in the March 2020 issue of International Musician.

As both a professional musician and a tax professional, I have been on both sides of the desk at tax time. Throughout the many years I have been preparing tax returns for, as well as consulting on, tax issues with musicians nationwide, I have often encountered many of the same questions. What can I deduct? What do I report? What records should I keep? Below are answers to some of the most commonly asked questions I receive every year:

Q: Can musicians paid as employees still deduct any business expenses?

A: The new Tax Cuts & Jobs Act that went into law last year completely disallows all employee business expense deductions at the Federal level. This means any expenses incurred as an employee or for the production of W-2 income are no longer currently deductible for anyone, including musicians. This law is in effect up until either 2025 or until we vote someone in who can change the law. This really hurts, especially if you buy expensive equipment, pay to have it maintained, and have thousands of dollars in work dues.

Please note that while Employee Business Expenses are not allowed on the Federal level, some states, such as New York, California, and Pennsylvania still allow them. It may be worth checking to see if you have enough to make a difference on your state return, if your state allows these deductions.

Q: Can we still deduct our business expenses if we are self-employed?

A: Absolutely. All ordinary and necessary expenses you incur to generate self-employment (1099) income are still deductible in full, with the exception of business meals, which are still only 50% deductible.

Q. What if I have expenses for both W-2 and for 1099 income?

A. Here’s the good news and the tricky part: Some, and perhaps even many, expenses incurred by musicians inevitably can generate both W-2 and 1099 income. For instance, your lessons/education, research, instruments, repairs, wardrobe, home office, etc., are often beneficial to your status as both an employee as well as a self-employed musician. Therefore, such expenses can be allocated to your income from self-employment and therefore still be deducted—some in full, and some proportionately. A good tax preparer familiar with the industry will know what to do here.

Q.  I heard that deducting your home office is an audit flag. Is this true?

A. This is an old rumor. In tax audits from the 1980s, the IRS found that most people who claimed a home office deduction did not really understand how to properly calculate it, so in 1990 they introduced the new Home Office Form 8829. This form shows exactly how to calculate the home office, and it is attached to your tax return. Since then, I haven’t heard of anyone being audited because they deducted a home office (unless they tried to deduct most of or all of their home).

Something else you should know: Your chances are of getting audited are even greater if you have no home office but have a lot of local transportation expenses. Here’s why: The IRS allows a deduction for transportation expenses between job locations, or travel to job locations out of town or outside of your regular work area, but traveling to and from jobs within your regular metropolitan area are considered non-deductible “commuting expenses,” and commuting to work is never deductible. If you can prove that you qualify for a legitimate Home Office deduction, then you can deduct your transportation from your home office to any other work location where you are self-employed and not an employee. This will qualify as deductible “transportation between jobs.” Therefore, the IRS may flag a return with high transportation expenses and no home office, because they might suspect the taxpayer is writing off non-deductible commuting expenses.

Q. What other transportation can I deduct?

A.  In addition to travel to jobs out of town, jobs outside of your normal work area, and transportation from job to job (including travel from your home office to another job location), you can also deduct travel to rehearsals, music stores, business meetings, auditions, lessons, classes, showcases, and other non-paid performances that are likely to result in work or valuable exposure.

Q. What if I use my car or truck for gigs? How do I keep records of this?

A. You should track all miles driven for business reasons, including all the reasons given in the paragraph above. One easy way to do this is with a good mileage app such as “Mile IQ,” “Mile Tracker,” or “Trip Cubby.” Such apps are easy to use, and the apps can even email you a spreadsheet with a record of every business trip you made and how many miles it was. Such a record is exactly what the IRS would want to see to substantiate the use of your car or truck for business.

Q. What about gas and other expenses like repairs and insurance?

A. For 2019, the IRS allows an automatic 58 cents per mile as a tax deduction. You may also use your mileage records to determine a deductible percentage of your actual expenses such as gas, insurance, repairs, and the cost of your car. Choosing which of these two ways to deduct your auto for business is best discussed with a tax professional familiar with your business. One can often be far better in the long run than the other, depending on many factors such as how long you plan on keeping the same car or how many miles per year you drive.

Q. Can I deduct the cost of making my own CD, or master? I heard the IRS actually has a special rule for this?

A. Yes, there is a special rule for this and a special procedure that must be followed. You must make what is called the “Safe Harbor” election on your tax return to amortize the production expenses over three years. If you fail to make this election and are audited, the IRS will take away your deduction and make you use a very complicated “units of production” method of depreciation. This method could provide hardly any deduction in the year you make the recording, and a much smaller deduction every year after that, for a really long time.

Electing the “safe harbor” will provide you with the huge write-off of 50% of the costs in the first year, and 25% for the next two years after that. Make sure that you have guidance from someone who is thoroughly familiar with this procedure and knows the code section well.

Q. I took a gig overseas and they want to withhold foreign taxes in all the countries I’m performing in. Can I get those taxes back when I file?

A.  While you cannot get those taxes refunded, you have two choices. You can either claim the “Foreign Tax Credit” on your US tax return, resulting in either a full or partial credit for the foreign taxes withheld, or if you have at least 45 days before the gig, you can apply to the IRS to get a Form 6166 “Certification of  US Tax Residency” and submit it to the payer in advance. This form takes about 45 days to get, it is signed and stamped by the IRS, and it shows that you are a US Resident Taxpayer, and you will pay taxes to the US on your foreign income. If that country, like most countries do, has a tax treaty with the US, in most cases it will waive the income tax withholding requirement. Just make sure that you set aside some of that gig income for the US taxes (and State/city taxes) you’ll owe on it when you eventually file your US tax return.

Q.  I received a per diem and/or expense reimbursement, can I still deduct expenses I paid with that per diem/expense reimbursement?

A.  There are two kinds of per diems or reimbursements: tax free and taxable. If you receive a tax-free per diem or tax-free reimbursement for any expenses such as meals, travel, or hotel, then you cannot deduct those reimbursed expenses. It is very important to check if the per diem or expense reimbursement is included on your 1099 as taxable income. If it is taxable, then you definitely can deduct those reimbursed expenses to avoid being taxed on the reimbursement. As always, make sure you have records of everything.

It is very important to note that one of the first things they now ask for in an audit, is a letter from anyone who hired you for a tour or out of town gig saying whether or not they paid you a per diem or reimbursed you for any travel expenses.

A comprehensive list of tax deductions for musicians can be found here: https://musictax.com/client-worksheets/

Q.  Do I have to report gig income if I didn’t get a 1099 for it and nobody reported it?

A.  The first thing that your examiner will ask for in an audit is your bank statements. If you don’t provide them, they will be subpoenaed directly from your bank(s). The examiner will add up all of your bank deposits and if they are more than you reported on your tax return, they will presume the difference is unreported income unless you can prove otherwise. Failure to report all of your income will definitely cost you negligence penalties plus interest, and they will look at other years to see if this is a pattern. In some cases, you may even run the risk of the IRS launching a criminal investigation.

Q. How long should I save my tax records & receipts?

A.  The IRS can normally go back three years from the date you filed your tax return or the actual due date, whichever is later. However, in cases of large misstatements of income or expenses they can go back six years. Best advice is to save all of your records for six years after the date you filed your return or the actual due date, whichever is later. Save copies of your tax returns for at least 10 years, if not longer. 

Q. What is the easiest way for a musician to keep records of self-employment income and expenses?

A. Best advice is to open a separate checking account, either a business account or simply another account that you call your “business account.” Also get a separate or a business credit card. Any W-2 income with taxes withheld should be deposited in your regular bank account, but any income where taxes are not withheld should be deposited in your business account. All business expenses should be paid either from the business account or the business credit card. Definitely keep receipts for all of these business expenses, but put them in an envelope or box because you won’t need them unless you’re audited.

When tax time comes, all of your expenses will be on the 12 bank statements and 12 credit card statements, making it very easy to categorize and add them up using a spreadsheet. No more unfolding and sifting through hard-to-read receipts! Likewise, your self-employment income will be easy to determine by just adding up your deposits. Note that anytime you put your own money into the business account, you do not count this as income. In fact, when you put you own money into your business account, end the amount in one cent (for example: $500.01) This way, when you go to add up your income, any amount that ends in one cent you will know not to count as income.

Q.  Should I form an LLC or a Corporation? Is there any tax savings?

A.  A single person LLC files taxes the same way as any other self-employed person, so there is virtually no difference except for the Limited Liability. However, there is no limited liability if the LLC is not formed correctly and run like a true LLC. 

Forming a Corporation is easy to do but a pain to maintain. An extra Corporate tax return must be filed, and the owner(s) by law must be put on ‘payroll’ with taxes withheld from each paycheck. The corporation must pay into unemployment for each owner/shareholder and in some states or instances a worker’s comp policy may be required. Add this to the stringent bookkeeping requirements and unless you’re earning enough to pay for all the added costs, it may not be worth it. What you may save in taxes could easily be eaten up by the extra payroll and accounting costs.There are instances however, when business expenses that you would be ineligible for as an employee could be paid by and deducted by your corporation if your employer would agree to pay your corporation instead of paying you as an employee, providing it was permissible by union bylaws.

Before forming any business entity such as an LLC or Corporation, a consultation with a good tax person that knows your profession can save you money and headache down the road.

Q. Is there any tax advantage to forming a Delaware LLC or a Delaware Corporation?

A. There is no tax advantage… in fact, it will cost you more in the long run. This is because you are also legally required to register your company in the state where you do most of your business and where your main office is, so you’ll be paying annual fees to two states. You will have to have to have a ‘registered agent’ in Delaware which also has an annual fee, so what’s the point? 

Q.  When should I worry about sending out 1099 Forms to other musicians and vendors I’ve paid? What are the penalties for not doing this?

A.  When you pay an individual or a company $600 or more for services rendered to you for business purposes, you must send them a Form 1099-MISC and file a copy with the IRS. The only exception is if the company you paid is a corporation or is taxed as a corporation, however, law firms must get a 1099 even if they are incorporated. The best way to find out if you are paying a corporation is to have your payee fill out and sign Form W-9 and return it to you.

The easiest and cheapest way to issue and file your 1099s is through a website called “efilemyforms.com” where they actually mail them out for you and e-file them with the IRS. If you are paying other musicians, accompanists, band members, arrangers, sound technicians, etc., you should have everyone fill out and sign Form W-9 (Google Form W-9 for a copy) and return it to you before you ever pay them. If you don’t then you may be scrambling to get their info in January as the filing deadline closes in.

The new penalties for failure to 1099s when required are now between $270 and $550 per 1099 not filed when required. The due date to file these forms is January 31. The new late penalties are $50 per 1099 for being up to 30 days late, $110 per 1099 for over 30 days late up to August 1, and if you file them after August 1 the late penalty is $270 per 1099. 

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In closing, remember that a good tax professional never actually costs you anything in the long run, but running afoul of the tax laws or not taking advantage of every tax break available can be costly. If we could, I and colleagues I regularly speak with would tell you about all the times we’ve had a musician bring his or her self-prepared tax returns to us for review, only to find opportunities that were lost because it was too late to go back and amend those returns and make retroactive elections that would have saved them much more than they would have paid a professional.

Glenn Franke is a specialist in taxes for musicians and the owner of Musictax.com, based in New York City, which offers tax preparation and accounting services for musicians, entertainers, and production personnel. He is a trained musician who spent years performing on tour with such artists as Michael Jackson, Sammy Davis Jr, Mel Torme, and Buddy Rich. Franke’s guest column is provided for informational purposes only, not as a substitute for advice from your personal tax professional.

AFM Applauds Proposed Tax Fix for Musicians

The American Federation of Musicians of the United States and Canada (AFM) applauds the introduction in mid-July of bipartisan legislation to help ensure musicians and other working performers are not unintentionally hit with tax increases after the passage of the Tax Cut and Jobs Act.

Many musicians are employees who incur significant expenses including concert clothing, travel costs, rehearsal space, studio time, instruments, and instrument repairs. Under prior law, the IRS allowed a deduction for necessary expenses incurred in connection with employment. The Tax Cuts and Jobs Act eliminated this ability to claim miscellaneous itemized deductions, which allowed performers to deduct work expenses. Many musicians can now pay substantially more in taxes as a result.

The Performing Artist Tax Parity Act (PATPA), introduced by U.S. Representative Judy Chu (D-CA) and Vern Buchanan (R-FL), would update the Qualified Performing Artist (QPA) tax deduction to help musicians and other performers deduct the costs of work-related expenses.

“Most working musicians and other performers need every penny they earn to survive in this economy. Musicians cannot afford to lose these deductions. We thank Representatives Chu and Buchanan for this much needed tax fix,” says AFM International President Ray Hair.

Tax Changes

Big Tax Changes for Musicians in 2018

Guest columnist Scott Stratton, trombonist and member of Local 72-147 (Dallas-Fort Worth, TX), provides commentary and direction for musicians navigating changes to US tax law. It is provided for informational purposes only, not as a substitute for advice from your personal tax professional.

The Tax Cuts And Jobs Act (TCJA) passed in December presents the most sweeping changes to US tax policy in 30 years and will have a significant impact on working musicians. The changes discussed below apply to your 2018 taxes. Your 2017 taxes (to be filed in April 2018) are still under the old rules.

Many musicians will find their federal income taxes decrease slightly, but there are so many changes that some musicians may actually see their taxes go up, especially if they are a W-2 employee, live in a high tax state, and previously had a significant amount of itemized deductions.

Most taxpayers will see a 1% to 4% reduction in their marginal tax rate, although some single taxpayers in the 28% bracket for 2017 have been bumped up to 32% and some in the 33% bracket will pay 35% in 2018. The new tax brackets have a sunset after 2025, when the 2017 tax rates are scheduled to return.

The standard deduction will increase from $6,350 in 2017 to $12,000 in 2018 for single taxpayers, and from $12,700 to $24,000 for married couples. However, the personal exemption of $4,050 has been eliminated, so the increase in tax-free income is really only from $10,400 to $12,000. A family of four previously would have had a standard deduction and personal exemptions of $28,900 and they will actually see this fall to $24,000. Offsetting this is an expansion of the Child Tax Credit from $1,000 to $2,000 and an increase of the qualifying income cap from $75,000 to $200,000 (single) and $110,000 to $400,000 (married).

For musicians who are W-2 employees, perhaps for an orchestra or university, it will become very difficult to have enough itemized deductions to exceed the standard deduction of $12,000/$24,000. That’s not only because of the higher levels, but also because the TCJA caps or eliminates many of our prior deductions. It is expected that the number of taxpayers who itemize will fall from around one-third to less than 10% in 2018.

First, your deduction of state and local taxes will be capped at $10,000 (single or married). For musicians who live in high tax areas, it is very possible that you spend significantly more than this amount on your property tax, state income tax, and sales tax. If you have a home equity loan or line of credit, those interest payments will no longer be deductible in 2018, unless the loan was used for the acquisition of that property.

Second, the TCJA has repealed all “Miscellaneous Itemized Deductions.” Starting in 2018, W-2 musicians can no longer deduct “Unreimbursed Employee Expenses,” such as buying an instrument, sheet music, supplies or equipment, required concert clothing, mileage, job search/audition expenses, research expenses for professors, or your home office expenses. Additionally, you can no longer deduct tax preparation fees, investment management fees, memberships to professional organizations, or union membership and work dues.

What is so unprecedented about this change is that it penalizes W-2 employees (who itemize deductions on Schedule A), but most of those costs remain valid expenses for musicians who are self-employed and report their business income on Schedule C. If you are a W-2 employee, and face losing all these deductions, I’d recommend you try to add some Schedule C income on the side, such as teaching private lessons in your home, so you can claim some of these expenses on Schedule C.

For self-employed musicians (including 1099), there are two additional benefits starting in 2018. First, there is a new 20% deduction for small businesses that are “pass-through” entities. Pass through entities will be taxed on only 80% of their qualified business income (QBI). A lot of musicians have asked me if they need to form an LLC or S-corporation to be eligible, but thankfully, the answer is no. Anyone who is a sole proprietor and reports on Schedule C can claim this deduction. You do not need to incorporate.

Here’s where it gets more complicated. Congress sought to limit the ability of service professionals such as doctors or lawyers to use this deduction, but the IRS definition of a “specified service business” also includes performing arts. This means that there is an income cap for musicians to qualify for the QBI deduction. To be eligible, your taxable income must be under $157,500 (single) or $315,000 (married). Above these amounts, the 20% deduction is phased out over the next $50,000 (single) or $100,000 (married). That’s still good news for most self-employed musicians.

The second benefit for self-employed musicians is the expansion of Section 179 rules. Section 179 allows small business owners to immediately deduct business purchases, such as musical instruments, sound and recording equipment, computers, office furniture, or certain business vehicles like an SUV or van. Without Section 179, these large purchases would have to be depreciated over a number of years. For 2018 through 2022, Section 179 limits have been increased, bonus depreciation has been increased from 50% to 100%, and used equipment is now eligible for bonus depreciation.

Please talk with your tax advisor about how these changes might impact your individual situation. The authors of the TCJA were clearly more concerned with helping businesses than employees. This is seen in how positive things are for self-employed musicians versus how W-2 musicians were given a mixed bag of small benefits in the standard deduction and lower tax rates, but an effective loss of the ability to itemize. One thing is for sure—it will help if you know in advance what you will be able to deduct and what is not deductible, and be sure to keep excellent records of receipts, mileage, and expenses.

—Scott Stratton, CFP, CFA is the president of Good Life Wealth Management and the publisher of www.FinanceForMusicians.com. He is a member of Local 72-147 (Dallas-Fort Worth, TX) and can be contacted at scott@goodlifewealth.com.

Tax Credits

Film and Television Tax Credits: Big Business and Critical to Entertainment Industry Labor

by Marc Sazer, President Recording Musicians Association

Tax CreditsBeginning in 1995 with a federal tax credit program, and followed soon after by provincial tax credit programs, Canada began investing in both creating a domestic film industry, and luring production jobs from elsewhere to Canada. Producers quickly followed the money.

Providing taxpayer funds for motion picture and television production has now become a worldwide phenomenon. The payroll company Entertainment Partners provides financial services to companies that exploit these incentives. Their website, www.epfinancialsolutions.com, gives a good overview of the scores of governments that provide incentives. We are in the midst of an international arms race for film/television tax credits.

These incentives rarely create new jobs for movies or television shows—they move jobs from one place to another. When a studio based in Burbank, Culver City, or Hollywood produces a movie with tax incentives in London, new jobs aren’t created, they’ve just been moved, displacing the vast majority of workers, including grips, drivers, camera operators, carpenters, and many others.

Music scoring has fallen into this same “arms race” of tax credits. While London has long had a vibrant recording industry, dozens of motion pictures produced by US companies take their scoring projects there now, reaping generous tax dollars (as well as avoiding the obligation to make health care and pension contributions that would be due on behalf of AFM musicians). The AFM remains number one in terms of motion picture film scores in the Western world, but the UK has lured an increasing number of “our” jobs to London.

Production and post-production work differently on any given film or television show. Production describes the filming, while post-production refers to editing, sound—and music. Post-production, which includes virtually all of the music scoring, happens on the tail end of the process.

Like London, New York has created a generous post-production tax credit that rewards producers for bringing scoring, editing, and mixing jobs to New York. It has taken a few years to take off, but in his October 2016 article in the Allegro, AFM Local 802 (New York City) President Tino Gagliardi noted that a record number of film scores were recorded in New York last year, including scores by Danny Elfman of Local 47 (Los Angeles, CA), Rachel Portman, and Nico Muhly. It is clear that the work follows the money!

Working with rank-and-file musicians, Local 47 President John Acosta is helping lead California to implement a music scoring tax credit there, tag-teaming on the existing $330 million annual tax credit program in that state.

If you are planning on pursuing film/television tax credits in your state or province, please reach out and let us share our experience and expertise with you. RMA’s goal, from coast to coast, is to work within the existing worldwide system to support good, industry-standard, union jobs. We are committed to helping musicians achieve these goals anywhere, anytime.

Canadian Waivers and Taxation for Foreign Artists

robert-bairdby Robert Baird, President Baird Artists Management (BAM!)

Ignoring the taxation requirements of a foreign country can lead to unforeseen complications, as this letter illustrates:

We sent an American ensemble to Canada in 2013. We had obtained an approved R-105 waiver in advance. Consequently, no taxes were withheld. We did not realize that we needed to file a Canadian tax return. When we applied for a waiver last summer, we were surprised to have it rejected. The presenter withheld 15% and we’d like to get it back. What do we do now? 

R-105 Waivers are used in Canada to reduce or eliminate the 15% required withholding on services provided in Canada by a nonresident. Even with an approved R105 waiver in Canada, you are still required to file a Canadian income tax return the following year; otherwise, subsequent waiver applications will be denied until your tax filings are up-to-date. This is made clear in the approval letter from Revenue Canada. R105 waivers do not represent the final Canadian tax obligation of a foreign artist: the ultimate tax liability can only be determined after an assessment of a Canadian tax return.

There are two types of R105 waiver applications:

1) Treaty-based waivers—Treaty-based waivers are granted if there is a treaty between Canada and another country. Currently, there are more than 80 tax treaties in force. (Visit http://www.fin.gc.ca/treaties-conventions/in_force-eng.asp for a list.) Generally, where there is a treaty, if an artist earns less than $5,000 a year in Canada, with certain restrictions on time spent in Canada, a waiver will be granted. For American artists the amount is less than $15,000 per year.

2) Income/expense waiver—If you do not qualify for a treaty-based waiver, you can still apply for an income/expense waiver. You submit a summary of your gross Canadian income and claim applicable expenses against that amount. The net income is then assessed for tax liability. A waiver may be granted or the required withholding may be less than the required 15%. Applicable expenses include: professional service fees (managers, agents, etc.); accommodations and/or meals; travel to Canada and between places in Canada; mileage for personally owned or rented vehicles used in Canada; equipment rental other than vehicles; and remuneration paid to other persons providing services in Canada (for example, resident or nonresident employees, or subcontractors).

[Note: Fees paid to nonresidents require the 15% withholding unless you acquire an approved R105 or R102 waiver for them as well].

Whether you received an approved waiver or had monies withheld, you should always file a Canadian tax return. It’s a requirement for future waiver approvals and you may receive a refund of monies withheld. Individuals should file a T1 return by April 30 and corporations a T2 return by June 30 of the following calendar year. In addition, if you used subcontractors or employees, you will need to issue T4A-NR slips to each individual, remit withheld monies to the receiver general of Canada by the 15th of the month, following the month in which the payment was made to the nonresident and file a T4A-NR information return (T4A-NR slips and summary form) by the last day of February in the year following the year in which the amounts were paid. Note that there are significant penalties for failing to file tax returns and required forms as indicated.

Nonresident artists need to be aware of waivers and tax filing requirements when coming to Canada to perform.

—I welcome your questions and concerns.
Please write to me at: robert@bairdartists.com. While I cannot answer every question I receive in this column, I will feature as many as I can and I promise to answer every e-mail I receive.

To read this article in French visit: www.internationalmusician.org/la-fiscalite-canadienne-et-les-dispenses.

United States Taxation for Foreign Artists

by Robert Baird, President Baird Artists Management (BAM!)

The issue of United States Taxation for foreign artists came up in a recent letter:

I have a band that is looking to play a corporate event in the US at the end of June. My accountant just informed me of the Central Withholding Agreement that could keep as much as 30% of our income—the final total being left at their discretion. My accountant tells me that it is likely just a matter of incorporating the business, which can be done fairly quickly. Can you help?

Dealing with taxation in any country is complex. The regulations regarding taxation for a foreign artist are customarily contained in a tax treaty between the two countries, and will apply differently to individuals than to businesses. However, it is not simply a matter of incorporating an individual or a performing group as a business because the IRS considers who the “beneficial owner” of the income is and, if any individual is named in the corporation, then the income is considered personal, not corporate.

In the US, the requirement is that anyone paying a foreign artist has to withhold 30% in taxes on US income. Anyone who withholds tax, be it a promoter, a venue, a presenter, a manager, or an agent, is designated by the IRS as a “withholding agent.” If the foreign artist fails to file a tax return and pay the required taxes, then the “withholding agent” is liable for any unpaid tax.

There are exceptions to this general principle:

A tax treaty may exempt a business from paying tax in a foreign country if it is recognized as a business by the IRS and has no “fixed establishment” in the US.

A tax treaty may allow a certain level of income for independent personal services to be earned tax-free, if the individual has no “fixed base” in the US and spends no more than a certain number of days in the country. For example, the Canada-US Tax Treaty allows an individual artist to earn $15,000 annually without taxation. However, earning more than $15,000 annually would make the individual taxable for the whole amount.

An individual (not a business) can enter into a Central Withholding Agreement (CWA) with the IRS whereby the IRS will estimate the actual tax liability of the artist and withhold less than the required 30%.

In years past, it was often enough to provide a US employer with a W-8BEN or a Form 8233 to avoid the required 30% tax withholding. Now, this is no longer regarded as sufficient. An employer cannot rely on these forms to avoid enforcement of the IRS requirement.

If it transpires that a foreign artist has been “over-taxed,” then a refund can be obtained by filing a tax return. Even if your income is exempt from US income tax, it’s a good idea to file annually. Individuals should file a Form 1040NR or Form 1040NR-EZ. Businesses should file a Form 1120-F.

At some point in the future it may become necessary to have your tax filings current before you are granted a work visa for the US. It’s a good idea to comply with all requirements for foreign taxation.

—I welcome your questions and concerns. Please write to me at: robert@bairdartists.com. While I cannot answer every question I receive in this column, I will feature as many as I can and I promise to answer every e-mail I receive.

Everything You Need to Know About Tax Numbers

robert-bairdby Robert Baird, President Baird Artists Management (BAM!)

Here is a recent e-mail from an AFM member:

Hi Robert,

I have a duo, and we have a tour of the US coming up in early 2016. We’ve been told that we’ll need an IRS Tax ID number because they’ll be withholding a percentage of our earnings. I’d appreciate your guidance on how you think we should proceed.

Revenue Canada and the IRS require tax numbers, both from individuals and businesses, for a variety of reasons:

1) If you are an individual applying for a tax waiver in Canada you need an Individual Tax Number (ITN).

2) If you are an individual filing a tax return in Canada you need an ITN.

3) If you are a business submitting a tax return in Canada, you need a Business Number (BN).

4) If you are a business applying for a tax waiver in Canada you need a BN.

5) If you are a business applying for a tax waiver in Canada you need to attach an application for an ITN for all employees or subcontractors.

6) If you are an individual submitting a tax return in the US, you need an Individual Taxpayer Identification Number (ITIN).

7) If you are an individual applying for a Central Withholding Agreement, you need an ITIN.

8) If you are a business submitting a W-8-BEN-E or filing a tax return in the US, you need an Employer Identification Number (EIN).

Both in Canada and the US an individual tax number is required if an individual is not eligible for a Social Insurance Number (SIN) in Canada or a Social Security Number (SSN) in the US. Obviously, this applies to nonresidents or occasional visitors such as artists on tour.

To get an ITN in Canada you simply submit a completed Revenue Canada Form T-1261 (www.cra-arc.gc.ca/E/pbg/tf/t1261/t1261-fill-14e.pdf) and attach the required supporting documents (passport, driver’s license, or birth certificate). The documents must be originals or certified copies. Documents can be certified by local officials such as doctors, accountants, lawyers, teachers, or officials in a federal department, by having them signed, dated, and noted: “Certified a True Copy.” Revenue Canada will send you an ITN (and return any original documents) in four to six weeks.

To get an ITIN in the US you file a W-7 (www.irs.gov/pub/irs-pdf/fw7.pdf) along with an income tax return (unless you meet one of the exceptions), and a passport, or a certified copy of a passport. Passports can only be certified by the office of issue. It can take eight to 10 weeks to get an ITIN. In certain circumstances you may have to apply for and be denied an SSN first. This requires a visit to a Social Security Administration Office in the US. The denial letter is attached to the W-7 when it is submitted.

To get a BN for Canada, simply submit Revenue Canada Form RC-1 (www.cra-arc.gc.ca/E/pbg/tf/rc1/rc1-fill-14e.pdf) along with a copy of your Certificate of Incorporation.

You can get an EIN immediately by telephone, in four to six weeks by fax, or in four to five weeks by mail. Follow the instructions on this website: www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-to-Apply-for-an-EIN.

It is important to remember that when you work in a foreign country, you should satisfy the tax requirements of that country. With the provisions of the Canada-US Tax Treaty, most tax liability is restricted to one’s own country, but it is a good idea to file an annual nonresident tax return where applicable, even if no taxes are owed.

—Please send your questions and concerns to me at: robert@bairdartists.com. While I cannot answer every question here, I will feature as many as I can, and I promise to answer every e-mail I receive.

Time to Think About Tax Refunds

by Robert Baird, President Baird Artists Management (BAM!)

robert-baird

It’s a new year and it’s time to start thinking about getting a refund of taxes withheld in a foreign country by filing a nonresident tax return.

Dear Crossing Borders,

To file taxes in the US to apply for a refund, what kind of paperwork do we need to ask promoters for? Should we be receiving copies of the forms they will be sending to the IRS? It’s my understanding that we should receive a notice from the IRS early in 2015, which will summarize the total amount that we’ve had withheld over the course of 2014. Is that correct?

First of all, it is a good idea to file a nonresident tax return if and when you work in another country. In fact, it’s the only way to get a refund of taxes that may have been withheld. We will deal with the requirements for the US and Canada separately.

United States

In the US, there is no requirement to file a nonresident tax return unless tax is owing. For work done in the US, you should receive a Form 1099 from whoever engaged you to perform. The IRS will not send you a summary of the amounts withheld; it is your responsibility to file for a refund of taxes withheld. The 1099s should be attached to your US tax return.

The US tax return for nonresidents is either a Form 1040-NR or a Form 1040-NR-EZ. If you wish to claim a refund of taxes that were withheld, you need to file a Form 1040NR. However, you do not need to file Form 1040NR if:

1) Your only U.S. trade or business was the performance of personal services; and

2) Your wages were less than $3,900; and

3) You have no other need to file a return to claim a refund of over-withheld taxes, to satisfy additional withholding at source, or to claim income exempt or partly exempt by treaty.

The Form 1040NR-EZ can be used if income from US sources is wages, salaries, and tips, refunds of state and local income taxes, and scholarship or fellowship grants. In addition, you may have to file a Form 8833 to claim certain Tax Treaty rights.

All nonresident tax filings go to Department of the Treasury, Internal Revenue Service, Austin, TX  73301-0215. In order to file a nonresident US tax return you will need to have an Individual Tax Identification Number (ITIN).

Canada

You are required to file a nonresident tax return if you owe tax, if you are requested to by Revenue Tax RefundsCanada, if you wish to claim a refund, or if you were granted a Tax Waiver. Not only is there a stiff penalty for failure to file a return, but arrears interest adds insult to injury, as it were. And, if you applied for and were granted a waiver in Canada, then a tax filing is required before further waivers will be considered.

For individuals, this means the filing of a T-1 Non-Resident return with a Schedule A Statement of World Income attached, along with any T4A-NR slips you received from Canadian venues. You will need to apply for an Individual Tax Number (ITN) when you file.

For businesses, you must file a T2 Non-resident return along with certain Schedules, a T4A-NR Summary (if you issued any T4A-NR slips to employees or subcontractors) and any T4A-NR slips you may have received. Businesses also need to apply for a Business Number for:

  • goods and services tax/harmonized sales tax (GST/HST);
  • payroll;
  • import/export; or
  • corporation income tax.

For both individuals and businesses in Canada, you can appoint a representative who will deal with Revenue Canada on your behalf and many nonresidents choose to do this, rather than have to deal with the culture and regulations of a foreign country.

All nonresident matters in Canada are dealt with in Ottawa. You can reach the International Tax and Non-resident Section by calling toll-free 1-800-959-8281 (individuals) or 1-800-959-5525 (businesses) and all nonresident filings go to International Tax Services, Revenue Canada, Post Office Box 9769, Station T, Ottawa ON  K1G 3Y4 CANADA.

Dealing with taxation is difficult enough in your own country, but performers should realize that keeping tax filings up to date in a foreign country just makes good business sense. Get your paperwork in order early and remember that the deadline for nonresident filings in both the US and Canada is June 15.

I welcome your questions and concerns. Please write to me at: robert@bairdartists.com. While I cannot answer every question I receive in this column, I will feature as many as I can and I promise to answer each and every e-mail I receive.