TurboSquid has been in discussion with the IRS to get clarification on how best to create 1042-S tax documentation that we send to artists at the end of the tax year. Based on those discussions, we have been advised to make some changes. These changes do not affect how much money that you are paid or what is withheld, but they may help you recover withholding back from the IRS. Below is a summary of these changes followed by a more detailed explanation.
- Separate Forms for Foreign and Domestic Earnings
In the past, we have provided artists with a single 1042-S form on which we reported all payments for that tax year. This included both foreign sales and U.S. sales and withholding. Now you may receive two 1042-S forms–one that includes payments for foreign sales and a separate one that includes payments for U.S. sales, including any withheld amounts. Depending on the customers of your products, you may be receiving one or both of these forms.
- Withholding Percentage Display
You will see a 0% withholding percentage on both 1042-S forms, but you will also see monies withheld according to the percentages set up on your account. While TurboSquid is withholding taxes on U.S. source income on your behalf, we believe that tax laws regarding the sales of 3d models are not well-defined by the IRS. We believe that showing a 0% withholding rate on the 1042-S forms will help foreign artists potentially get their withholdings back from the IRS. To be safe, we are continuing to send the withholding money at your normal rate to the IRS. However, you may be eligible to recover this money from the IRS.
We know that this may be confusing, but these changes will not impact the amounts that you are paid or any withholding that we collect on your behalf. This only impacts how the withholding is shown to the IRS. As always, TurboSquid cannot give you any tax advice, so if you have any questions about these changes or about how to potentially recover withholdings, you will need to consult a tax professional. Please visit our Tax Documentation FAQ if you would like to learn more information about Form 1042-S.
Detailed explanation of changes
The IRS has advised that TurboSquid must complete a separate Form 1042-S for an individual’s total income if there are different rates of applicable withholding. As a result, TurboSquid will issue to you two versions of Form 1042-S; one Form 1042-S reflecting income paid on which U.S. income tax was withheld (in most cases your United States Source Income), and a second Form 1042-S reflecting income paid on which no U. S. income tax was withheld (in most cases your non-United States Source Income). We have also made a few changes in numeric codes.
As noted in our Withholding Policy explained earlier:
The United States Internal Revenue Service (IRS) characterizes TurboSquid as a “withholding Agent.” As a result, TurboSquid is required to follow the complex rules and regulations contained in “chapter 3“ of the Internal Revenue Code, sections 1441 through 1464. Parts of TurboSquid’s requirements are to obtain “Status Documentation” (usually from a W-8BEN), withhold federal Income taxes at a statutory rate of 30% (unless a documented exception, such as a tax treaty rate, applies), and file income tax and information returns (Form 1042-S).
The particular set of rules and regulations that TurboSquid must follow is dependent upon the character of income (i.e. Wages-Dividends, Royalty etc.), source of income (U.S. vs. Foreign), and status of the recipient.
The tax laws and regulations are not well-defined in regards to the area of Internet transactions and compensation for transactions regarding “program models.” In fact, the IRS provides little guidance on these particular types of transactions. TurboSquid worked with an international Tax Consultant, who provided guidance in the withholding area. The consultant’s conclusions were as follows:
- The area of tax law regarding TurboSquid transactions is not well-defined and a single factor could change the outcome.
A simple example of the determination of how the United States would tax a “payment of royalty income” is as follows:
If a non-U.S. citizen/nonresident alien is not engaged in a “U.S. trade or business” and receives a “U.S. source royalty income” payment, the payment is subject to a U.S. FLAT TAX of 30% of gross amount paid – no deductions allowable. If the non-U.S. citizen/nonresident alien is a tax resident in a country with which the United States has a tax treaty, if applicable, the 30% tax rate may be reduced or the royalty may not even be subject to a U.S. tax (form W-BEN etc. is used to document a tax treaty application).
If a non-U.S. citizen/nonresident alien is engaged in a “U.S. trade or business“and receives a “U.S. source royalty income payment,” the payment is subject to a different set of U.S. taxation rules. The FLAT RATE of 30% of gross amount paid – no deductions allowable- is NOT applicable. If a non-U.S. citizen/nonresident alien receives trade or business income, the U.S. taxes such income in a manner that is similar to taxation of a U.S. citizen/nonresident alien. The non-U.S. citizen/nonresident alien files a U.S. Income Tax Return (Form1040NR) reporting gross income, deducting applicable business expenses, etc. and computing their U.S. income tax liability on a net income basis at the applicable graduated rates.
- The IRS could not precisely determine the “characterization” of the income. Arguments exist for the character of the payment to be royalty Income, commission income, sales proceeds, etc. Each different characterization would result in a different conclusion.
- The “source” of the E Commerce transactions income likewise, is not well-defined.
In attempting to comply with the IRS laws and regulations, the International Tax Consultant recommended that compensation related to the acquisition/use of the programs obtained by U.S. users would be U.S. Source Income. It was recommended that we characterize it as “other Income” on Form 1042-S. This is because there is no precise characterization for the compensation paid. The Tax Consultant further recommended that the rate of withholding of tax would be based on the character of income being a royalty. If a properly completed Form W-8 BEN (including a Taxpayer Identification Number) were received, a lower Tax Treaty Rate could and would be allowed.
The approach TurboSquid has taken is one of which protects our liability and responsibility for compliance with the IRS laws and regulations. We pay the Income tax withheld and reported on Form 1042-S to the IRS and is a deposit on the U.S income tax liability of the recipient.
The Non-Resident Alien (NRA) withholding taxes that TurboSquid withholds are, in effect, a deposit with the IRS toward your ultimate U.S. income tax liability. Generally, if the amount withheld fully satisfies your U.S. income taxes owed, there is no requirement to file a U.S. Income Tax Return. If the withheld taxes are over-withheld in error for you particular facts and situation, you have the option to tell the IRS why and potentially obtain a refund of the over-withheld amounts by filing a U.S. Income Tax Return (Form1040NR). If the amount withheld does not fully satisfy your ultimate U.S. income taxes owed, you should file a U.S. Income Tax Return, paying the amount owed.
Simply put, in most cases if the recipient’s U. S. Income tax liability is fully satisfied by withholding at source (TurboSquid), there is no requirement for the recipient to file a U.S. income tax return.
If for some reason due to the particular facts and circumstances, the recipient is of the opinion that the compensation is something other than U. S. source royalties; the recipient is able to file a U.S. Income Tax Return and obtain a refund if applicable. The withheld taxes are a credit for the recipient’s actual U.S. tax liability when a return is filed.
We are prohibited from providing tax advice. It is advisable that the recipient discuss the matter with his/her tax advisor to ascertain if the tax withheld is the correct U.S. tax liability or if a U. S. income tax return should be filed to obtain a refund.