Foreign athletes and entertainers who earn income in the United States are subject to U.S. tax withholding and reporting under special tax rules. IRS Form 1042-S is used to report income paid to nonresident aliens and the taxes withheld on that income.
What Is IRS Form 1042-S?
Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, is issued to nonresident aliens, foreign corporations, and other foreign entities that earn U.S.-sourced income. For foreign athletes and entertainers, this typically includes:
- Appearance fees
- Prize winnings
- Sponsorship payments
- Endorsement deals
- Performance earnings (e.g., concerts, games, or public events)
How Foreign Athletes and Entertainers Are Taxed
1. 30% Withholding Tax on U.S.-Source Income
- By default, the IRS requires a 30% withholding tax on U.S.-sourced income for foreign individuals.
- This applies before expenses are deducted unless a reduced treaty rate applies.
2. Central Withholding Agreements (CWA) for Lower Tax Rates
- Foreign athletes and entertainers may apply for a Central Withholding Agreement (CWA) with the IRS to reduce withholding based on estimated net income after expenses.
- CWAs allow for lower tax withholding, ensuring athletes and entertainers pay taxes based on their actual earnings rather than gross revenue.
3. Tax Treaties May Reduce Withholding
- Some countries have tax treaties with the U.S. that allow foreign entertainers and athletes to be taxed at a lower rate or exempt certain earnings.
- To claim a reduced tax rate, individuals must file Form W-8BEN with the withholding agent.
Filing Requirements for Foreign Athletes and Entertainers
- Foreign entertainers and athletes must file a U.S. tax return (Form 1040-NR) to report their income and potentially claim a refund if too much tax was withheld.
- The Form 1042-S they receive will detail their income and tax withholding, which they must include on their tax return.
