In general, the IRS says, “a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%.” – So, what does it mean if you receive income from YouTube or Google in 2021?
And what should you do if you make payments to non-U.S. persons?
YouTube and its advisors proactively determined the company is required to withhold tax under Chapter 3 of the U.S. Internal Revenue Code when non-U.S. creators earn income from viewers in the U.S. In March of 2021, YouTube required creators to send tax information (Forms W-8 for foreign creators, Form W-9 for U.S. creators) by May 31, 2021, to determine how much tax to withhold. If a creator did not send tax information by that date, YouTube would deduct 24% of their worldwide income, not just U.S. based earnings, as backup withholding. Non-U.S. creators who live in countries that do not have tax treaties with the U.S. will have their U.S. based revenue taxed at 30%. What revenue is taxed? It appears everything:
- Revenue from Ad views
- YouTube Premium
- Super Chat
- Super Stickers
- Channel memberships
Google followed suit.Google AdSense is a program through which website publishers in the Google Network of content sites serve text, images, or video media advertisements that are targeted to the site content and audience. Payments received in relation to Google products usually fall into multiple categories:
- Copyright Royalties (such as Play and YouTube Partner Program)
- Motion Picture & TV Royalties (such as certain YouTube Movies and Shows and Play partners)
- Services (such as AdSense)
Foreign individuals or businesses who earn AdSense income from U.S. consumers were required to send tax information by May 31, 2021.
Example: A foreign taxpayer earns $50,000 worldwide income and $10,000 U.S. revenue from Google. Below are possible outcomes:
- If the tax information is submitted, the tax withholding will be 30% of U.S. earned income ( $3,000) if a treaty benefit is not claimed.
- If tax information is not submitted, the tax withholding will be 24% on worldwide income, not just U.S. based earnings ($12,000).
- If a treaty benefit is claimed, the tax withholding rate could be reduced, even to zero.
The Foreign Account Tax Compliance Act (FATCA) is an additional reporting and withholding regime, which is not designed to impose a withholding tax, but rather is designed to capture information about U.S. persons. The “withholdable” payments could be interest, dividends, rents, certain other specified items of income from U.S. sources, and/or gross proceeds from the sale or other disposition of property of a type which can produce interest or dividends from U.S. sources. The 30% Non-Resident Alien (NRA) withholding is generally required on U.S. source “Fixed or Determinable, Annual or Periodic” (FDAP) income paid to foreign persons (including entities and individuals). Any payments of FDAP income must be treated as a U.S. source if not clearly determined to be a foreign source. A payor is responsible for any withholding tax it should have withheld. Penalties and interest may be assessed if taxes are not withheld properly.
Steps for U.S. Withholding Compliance:
STEP 1:
- Determine Type of Income Paid
STEP 2:
- Determine if the Payee is a U.S. Vendor
STEP 3:
- Document Source of Income
- If no Form W-9 and foreign payee indicia assume payee is foreign and withhold 30% if U.S. Source Income
- If Foreign Source income, no withholding or reporting is required
STEP 4: If U.S. Source Income. . .
- Determine if payment is “withholdable” for FATCA
- If not FATCA, Use Form W-8 to determine withholding requirements
- If no Form W-8, withhold 30%
- Report income and tax withheld on Form 1042-S
STEP 5: FATCA Status?
- If subject to withholding under FATCA and Form W-8 is furnished, withhold under Chapter 3 (See Step 4)
STEP 6: FATCA Withholding?
- If no valid Chapter 4 Certification (on Form W-8), withhold 30%
- Report income and tax withheld on Form 1042-S
Author: Sehar Javaid, CPA | [email protected]
Podcast Spotlight
Listen in to our latest episode of Taxing Topics as Kimberlee Phelan and Sehar Javaid have a discussion on YouTube and Google’s withholding tax impacts on foreign individuals and businesses.
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