Will my illustrator in Switzerland owe U.S. taxes?
March 26, 2020 6:23 PM Subscribe
You are not my tax professional. I am paying a substantial amount for illustration to a Swiss citizen, well above the tax liability cutoff for freelance work in the U.S. Does she need to pay U.S. taxes on it, or only Swiss?
Because of the current state of publishing, if I want illustrations in my book I am paying for them out of pocket. That's okay (or anyway it was okay before we hit a potentially historic depression and I started feeling a lot of anxiety about spending this much of my advance but OH WELL), but it means that I don't really have the support of an accounting department in figuring out stuff like this.
The illustrator is a Swiss citizen living in Switzerland. The amount of money is substantial to me but negligible on the scale of international trade—think more than $1000 but less than $5000. My understanding of this document about the U.S./Swiss tax treaty is that contracted illustration falls under "independent personal services" and that because she has no "fixed base" in this country (U.S. residency, office, or presence) she would be exempt from U.S. taxes. But I also really don't want to steer her wrong or get either of us in trouble! Can someone with a better head for this language set my mind at ease?
I know you are not my tax professional/international treaty interpreter/Swiss person with experience doing international freelance work! But I am pretty sure the answer to this is straightforward and contained in the document linked, and I'd rather not pay more out of pocket for pro advice.
Because of the current state of publishing, if I want illustrations in my book I am paying for them out of pocket. That's okay (or anyway it was okay before we hit a potentially historic depression and I started feeling a lot of anxiety about spending this much of my advance but OH WELL), but it means that I don't really have the support of an accounting department in figuring out stuff like this.
The illustrator is a Swiss citizen living in Switzerland. The amount of money is substantial to me but negligible on the scale of international trade—think more than $1000 but less than $5000. My understanding of this document about the U.S./Swiss tax treaty is that contracted illustration falls under "independent personal services" and that because she has no "fixed base" in this country (U.S. residency, office, or presence) she would be exempt from U.S. taxes. But I also really don't want to steer her wrong or get either of us in trouble! Can someone with a better head for this language set my mind at ease?
I know you are not my tax professional/international treaty interpreter/Swiss person with experience doing international freelance work! But I am pretty sure the answer to this is straightforward and contained in the document linked, and I'd rather not pay more out of pocket for pro advice.
Here's a particular IRS source (note, importantly "alien" is a term of art in legal context to refer to a non-US citizen - I am using it in the legal context, not in a judgmental or politicized sense)
As a general rule, wages earned by nonresident aliens for services performed outside of the United States for any employer are foreign source income and therefore are not subject to reporting and withholding of U.S. federal income tax.posted by saeculorum at 7:07 PM on March 26, 2020
The issue of whether your contractor needs to pay taxes is separate from your filing and withholding requirements with the IRS. As long as your Swiss illustrator is a contractor, not a U.S. person, and the services he or she provides are wholly performed outside the U.S., then you don't have to issue your illustration a Form 1099 and withholding isn't required (i.e. where you withhold a portion of the payment and send it to the IRS for a possible later refund).
If the IRS ever audits you, how do prove that you didn't need to file a 1099, that is, how do prove both that your contractor is not a U.S. person and did not perform the services in the U.S.? Per 26 CFR § 1.1441-1 (b)(3), the easiest way to demonstrate your contractor is not a U.S. person is to ask the contractor to complete a valid Form W-8BEN which allows them to certify that they are not a U.S. person and whether a withholding requirement exists under the applicable tax treaty. With regards to proving they did not perform the services in the U.S. it is best to have the foreign contractor sign a statement confirming that none of the services provided were provided in the U.S. This statement can be attached to the Form W-8BEN. You aren't required to file the Form W-8BEN with the IRS, just keep it in case you are ever audited. More details here.
In some cases a foreign contractor is subject to U.S. tax on its U.S. source income (often at a 30% tax rate). A reduced rate may apply if there is a tax treaty between the foreign person’s country of residence and the U.S. In particular, I think you are correct, under the terms of the U.S.-Swiss tax treaty your illustrator would not have to pay taxes on this income if it qualifies as "independent personal services". Under Swiss law your illustrator may be required to report your payments to him or her for the purposes of paying Swiss taxes and it is possible that some portion of those taxes may be remitted to the U.S. by the Swiss government as part of a tax treaty.
However, saeculorum makes a good point — you probably should not be offering tax advice to your foreign contractor. Concern yourself with meeting your own reporting and withholding obligations and let your contractor handle his or her own taxes.
posted by RichardP at 7:12 PM on March 26, 2020 [2 favorites]
If the IRS ever audits you, how do prove that you didn't need to file a 1099, that is, how do prove both that your contractor is not a U.S. person and did not perform the services in the U.S.? Per 26 CFR § 1.1441-1 (b)(3), the easiest way to demonstrate your contractor is not a U.S. person is to ask the contractor to complete a valid Form W-8BEN which allows them to certify that they are not a U.S. person and whether a withholding requirement exists under the applicable tax treaty. With regards to proving they did not perform the services in the U.S. it is best to have the foreign contractor sign a statement confirming that none of the services provided were provided in the U.S. This statement can be attached to the Form W-8BEN. You aren't required to file the Form W-8BEN with the IRS, just keep it in case you are ever audited. More details here.
In some cases a foreign contractor is subject to U.S. tax on its U.S. source income (often at a 30% tax rate). A reduced rate may apply if there is a tax treaty between the foreign person’s country of residence and the U.S. In particular, I think you are correct, under the terms of the U.S.-Swiss tax treaty your illustrator would not have to pay taxes on this income if it qualifies as "independent personal services". Under Swiss law your illustrator may be required to report your payments to him or her for the purposes of paying Swiss taxes and it is possible that some portion of those taxes may be remitted to the U.S. by the Swiss government as part of a tax treaty.
However, saeculorum makes a good point — you probably should not be offering tax advice to your foreign contractor. Concern yourself with meeting your own reporting and withholding obligations and let your contractor handle his or her own taxes.
posted by RichardP at 7:12 PM on March 26, 2020 [2 favorites]
Response by poster: Thanks RichardP—we send the W8-BEN to foreign freelancers at my publication but since I don't handle the other end of it (sending 1099s etc.) I wasn't sure what it meant in terms of actual obligation. This helps.
The reason I am asking the question is, as mentioned, because I don't want to get in trouble nor do I want a young freelancer to get in trouble. English is not her first language and tax code is complicated; I am 40 years old and fluent in English and I still am probably going to end up double-paying taxes on some Canadian income from last year just because I got confused about the exemption forms. And the organization paying me did try to explain it! So I feel it's morally correct, if not legally obligated, to provide at least some guidance.
posted by babelfish at 10:15 AM on March 27, 2020
The reason I am asking the question is, as mentioned, because I don't want to get in trouble nor do I want a young freelancer to get in trouble. English is not her first language and tax code is complicated; I am 40 years old and fluent in English and I still am probably going to end up double-paying taxes on some Canadian income from last year just because I got confused about the exemption forms. And the organization paying me did try to explain it! So I feel it's morally correct, if not legally obligated, to provide at least some guidance.
posted by babelfish at 10:15 AM on March 27, 2020
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That said, having paid for professional services in Switzerland well in excess of that amount, I can say with fairly high confidence that she will not owe any US taxes. This is roughly similar to all other countries I'm familiar with (with the notable exception of US citizens) - income from selling services or items out of country is taxed in the country of the person/organization performing the services. Since she is not delivering goods, duty/import taxes are not in question.
posted by saeculorum at 6:57 PM on March 26, 2020 [1 favorite]