Giulio Zambon's Website
This 'n that - US taxes & royalties

For the US authorities, you are a non-resident alien (green skin, bug eyes, and all) if you are not a US citizen and have no business presence of any type in the USA. Perhaps you are allowed to have a bank account in the US, but I am not sure. You will have to check that out yourself. A good place to start is the following URL: www.irs.gov/taxtopics/tc851.html. In any case, if you are not a non-resident alien, this page is of no interest to you.

In the United States, taxes are paid to the Internal Revenue Service (IRS), which is a division of the Department of the Treasury. Even if you never set foot in the US, as soon as you earn something from an American source, the IRS will find a way to grab a share of your money. This is very reasonable, but usually also quite annoying. For example, if you publish a story in a US magazine and receive for it a payment of USD 500 (you wish! :-), the publisher withholds 30% of your payment (i.e., USD 150) and forwards it to the IRS. Then, after the end of the US Fiscal Year (which coincides with the solar year), you receive two copies of form 1042-S, like the following one:

1042-S

This is a copy of the 1042-S form I received for my royalties on the html book published by Apress. I have altered the dollar amounts to reflect the example and masked my personal data.

In this page, I will explain how to avoid being taxed 30% at the source and, in case tax was already withheld by your publisher, how to get a refund from the IRS. But first, a word of caution. What I am going to explain only fully applies to US aliens who are Australian residents. If you reside in another country, you will have to make some adjustments, which I will highlight as we go. If you run into problems and let me know about them, I will update this page, so that somebody might benefit from your misfortune.

DISCLAIMER: What I describe here worked for me, but I cannot guarantee that it will work for you. Your situation might be different from mine, or who knows what. If you follow the steps I describe in this page and fail to 'snatch' your money from the grip of the IRS, please don't blame me. The IRS website has a lot of information, including PDFs explaining in great detail how to fill in their forms. I have tried to be accurate, but you could decide to take my description as an introduction, and use it just as a guide to help you understand the official explanations. If you do so though, be prepared: there are lots of forms and explanations...

Australia has a tax agreement with the US. The text of the treaty is available from the web sites of the Australian and US governments, but I have copied it here for your convenience. Article 12 states that royalties may be taxed in either state, but the taxes charged at the source cannot exceed 10% of the amount earned. Then, you will probably be asking, why do US publishers withold 30%? The answer is simple: for the treaty to take effect, you have first to prove to the IRS that you are a non-resident alien and that the country you reside in has a double-taxation treaty with the US that sets a limit to what they can withhold. Clearly, if you are not an Australian resident, you will have to look for a double-taxation treaty between the US and the country you reside in. There might not be any, in which case, you will be stuck with the 30% deduction.

Proving that you are a non-resident alien

So, the next question is: how do I prove to the IRS that I am a non-resident alien? You must obtain from the IRS an Individual Taxpayer Identification Number (ITIN). It makes sense: they want to be able to identify you univocally and you don't have a Social Security Number. To obtain an ITIN, you have to fill in a form W-7 (Application for IRS Individual Taxpayer Identification Number), which you can download from the IRS website: W-7

W-7 is one of those PDF forms that can be filled in and saved. Right-click here and select "Save Link As..." to download a pre-filled copy of the form. You will have to update the fields containing personal information (1a, 2, 4, 5, 6a, 6b, and 6d). After you have printed out the form, fill in by hand the three fields of the "Sign Here" section (signature, month/day/year, and phone number.

To be safe, you should download the form from the IRS website in any case, because they keep changing this form, and you definitely want to have the latest version. The revision of the form is marked in the bottom-right corner (e.g., Rev. 1-2010). If you fill in a new form, pay attention not to miss any field that I filled in in my example. Notice that towards the top of the form, I ticked both boxes 'a' and 'h'.

OK. Now you have the W-7 form filled in correctly, but you need some attachments before you can send it to the IRS. One of them is a letter from your publisher to identify themselves and confirm that they are paying to you royalties. What follows is a copy of the letter I received from Apress.

Letter from Apress

They sent it to me via email. Therefore, I can confirm that the IRS will accept a scanned copy instead of an original.

But you also need another document to send with your filled-in W-7 form. You need a certified copy of your passport with an apostille. Basically, the IRS wants to be sure of your identity. For that, they want to have a copy of your passport certified by a notary. And to be sure that the certification of the notary is not a fake, they want to have his certification certified by an authority that they recognise. This second certification is what is called 'apostille'. You will have to find a notary and an authority in your state or territory. In the ACT, I picked a notary public (Uwe Daniel Boettcher, in Forrest) and got from him on the photocopy of my passport a stamp stating "Certified a True and Correct Copy of the Original", his signature, and his business stamp. This cost me AUD 80. I then walked to the Department of Foreign Affairs and Trade and got the apostille in the form of another stamp and an old-fashion seal. This cost me an additional AUD 60.

You can finally send your W-7 form, the letter from your publisher, and the doubly-certified copy of your passport to the IRS. The address is:
Internal Revenue Service
ITIN Operations
Mail Stop 6090 - AUSC
3651 S. Interregional, Hwy 35
Austin, TX 78741-0000
U.S.A.
After so much effort to get everything right, I decidd to send the letter registered, which cost me another AUD 12. Total cost to apply for an ITIN: AUD 152. But the ITIN is valid for the rest of your life. Therefore, if you have already published something in the US, it will probably be worth getting it. Do not send the letter registered with confirmation of receipt, because you will get it back, as nobody sits inside post office boxes to sign the confirmation cards. Anyhow, if everything goes as expected, you will get a letter like the following one (I have masked the ITIN, which is in the form NNN-NN-NNNN):

ITIN

Informing your publisher

Once you have your ITIN, you have to communicate it to your publisher. If you haven't yet done it, you also have to send to the publisher a filled-in W-8BEN form, of which this is an example. This form is designed for American businesses to help them distinguish between different categories of tax payers.

After I communicated to Apress my IPIN, they confirmed to me via email that from then on, they would only withhold for the IRS 5% of my payments. According to the double-taxation treaty, they would have been entitled to withhold 10%, but who am I to protest? :-)

Obtaining a refund from the IRS

Conceptually, it is simple: you need to make a tax return in the US and attach to it the 1042-S form you have received from the IRS (see the top of this page). In practice, it is obviously not trivial, because you have to find the right tax return form and fill it in correctly. The form you need is called 1040NR (the NR stands for Non-Resident). I will show you in a moment an example of how to fill it in, but this form has the fiscal year hardcoded. Therefore, you will have to download the version for the current fiscal year. To do so, go to the IRS search page and search for 1040NR. The first two entries will probably be the form itself and the instruction manual for it.

OK. Here is the 1040NR form as I filled it in for the FY 2009. I have altered the figures to reflect the changes I have already made to the form 1042-S. I have also masked my ITIN. To understand how it works, start from page 4. As you can see, I have entered $500 in the table "Tax on Income Not Effectively Connected With a U.S. Trade or Business". The fact that your royalties are not directly connected with a business in the US is what makes possible for you to obtain a refund. Notice that I have typed the $500 in the column marked 10%. That is because, as I have already said, 10% is what the IRS is allowed to withhold on the basis of the double-taxation treaty. If you now go to page 1, line 22, you will see that I have also entered $500 there. In page 2, lines 52 and 57, I have entered the $50 that the IRS is allowed to withhold. The $150 that have been withheld appear in line 58a and in line 66 of page 2. Notice that the form 1042-S is mentioned in the description of line 58a. Finally, in line 67 of page 2, you enter the amount of $100, which is what the IRS owes you. To have it refunded, you need to enter again $100 in line 68a and 0 in line 69.

To complete the tax return, I filled in with seroes most of the fields in the rightmost column, where I thought that it made sense. Go through the questions of page 5 and answer them as it is appropriate for your situation. Notice that you have to enter your US income once more at the bottom of page 5.

To get your money, print the form and send it, together with one of the copies of form 1042-S you received from the IRS. The deadline for filing the return was in 2009 April 15th. The address is:
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
U.S.A.

I sent my tax return on March 24th, 2010 (another AUD 12 of registered mail) and received my refund on May 14th:

Refund cheque

Final remarks

It cost me AUD 20 to get the IRS cheque credited to my Westpac bank account. Clearly, you have to make your sums before you ask for a refund. The whole amount of USD 500 of the example is taxable in Australia, but I believe that the USD 50 left in the hands of the IRS should count as tax credit, because the purpose of double-taxation treaties is precisely to avoid that the same earnings are taxed in both countries. I hope that this page will make your dealings with the US taxation system a bit easier.

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