On Non-U.S. Persons and Source of Income

A Refresher

What is a non-U.S. person? You need to know the answer to that in the context of payment reporting to the IRS. What income of a non-U.S. person do you have to report? These are just two of the many questions that arise when you gather tax IDs and classifications in preparation for 1099 and 1042-S reporting.

Did you know the U.S. tax code does not explicitly define non-U.S. persons? Rather, the code defines them by exclusion. The code defines a U.S. person. If one is not a U.S. person, then by definition of exclusion, they are a non-U.S. person. Easy!

We should point out here that “person” has a broad definition that includes entities as well as individuals. Entities are corporations, trusts, partnerships and estates, as well as individuals.

Any entity formed under U.S. laws is considered a U.S. person, and for our purposes here, is subject to 1099 reporting. (Said persons should submit a W-9 to your organization.) Oh, and one more thing. Resident aliens are considered U.S. persons too.

Those persons and entities that do not fall within those are non-U.S. persons. You report the payments you make to them on a 1042-S. They should submit their tax information and apply for withholding exemptions via the appropriate form of the many W-8s or form 8233 (for individuals claiming withholding exemption on payment for personal services).

Reportable Income to Non-U.S. Persons

What must you report and possibly withhold of payments to non-U.S. persons? Not necessarily everything, or even anything. It depends on whether the payment is “U.S. source income.” That is, what part of their income did they earn in the U.S.

You determine source of income depending on type of income and location earned. For example, payment for services performed in the United States is reportable. Payment for services performed outside the United States is not. If you paid for some services that were done here and some that were not, you have to report only that part done here.

(Note that this is different for payments to U.S. persons. All income of U.S. persons is subject to U.S. tax, wherever it is earned.)

Here is a list from the IRS of what determines source for income for the common payment types going through accounts payable:

• Salaries, wages, other compensation: Where services performed
• Business income – personal services: Where services performed
• Rents: Location of Property
• Royalties – natural resources: Location of property
• Royalties – patents, copyrights, etc.: Where property is used
• Scholarships/Fellowships: Generally, residence of the payer

See Nonresident Aliens – Source of Income for full list to determine income source for nonresident aliens.

For help gathering documents from vendors including the correct W-8 or 8233, contact us.