In the global village where we live, U.S. companies are not limited to U.S. individuals when searching for the right service provider. U.S. companies often hire non-U.S. individuals for the job. These individuals include non-U.S. citizens living outside the U.S., who generally don't need to be present in the U.S. to provide services, and non-U.S. citizens who are temporarily present in the U.S. on an appropriate visa.
Generally, temporary immigrants will be considered U.S. tax residents under the substantial presence rule if present in the U.S. for a sufficient number of days. However, in certain fact patterns, a special rule may exempt days of presence in the U.S. from being counted towards residence status. An example is an individual present in the U.S. under an F-1 (student) visa who is working during a period of optional practical training.
In connection with income from the performance of services, non-U.S. individuals are subject to U.S. tax only on U.S.-source income. With limited exceptions, compensation income is sourced to the location where the services are performed. As a result, no U.S. withholding tax would apply to compensation payment for an individual who is an independent contractor and the following conditions are met:
- The individual is not a U.S. tax resident.1
- The services are not performed while present in the U.S., in whole or in part.
Once services are performed in the U.S., even in part, the payment is considered to be a U.S.-source payment to a greater or lesser extent based on the quantum of services performed and the place or places where performed. Factors that are not relevant to the source of the income include the individual's place of residence, the place where the contract for service was entered, and the place of payment. When services are performed from both within and without the U.S., the payment must be allocated between the U.S. and the foreign country, generally on the basis of the time spent in each place for performance of services.
When a non-U.S. person performs personal services in the U.S. they are generally treated as engaged in a trade or business in the U.S. and tax is due on the U.S.source portion of the compensation. When an employee-employer relationship exists, the tax is taken care of through graduated withholding in a similar manner to the way wages are withheld on for U.S. citizens and residents.2 But when an employment relationship is not established, and the relationship is that of an independent service provider, how is the U.S. tax liability settled? Is the independent contractor responsible for their own tax payment or is the principal company obligated to withhold 30% of the gross amount paid under the general statutory rule applicable to a non-U.S. person receiving fixed, determinable, annual, and periodic income ("F.D.A.P. payments")?
This is an excerpt of a longer article, which you can find on our website via this link; Do You Have To Withhold 30% On Payments To A Non-U.S. Independent Contractor?
1 Generally, a U.S. resident includes a U.S. citizen and a non-U.S. citizen who holds a green card or meets the substantial presence test. The determination of U.S. tax residency will not be discussed further in this article.
2 Note that while the tax liability is taken care of via withholding, the non-U.S.
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