[IMGCAP(1)]Twenty years ago, a Central Withholding Agreement could easily be negotiated via a phone call and follow-up letter to a designated Internal Revenue Service agent. Today, that’s not the case.
Though the goal is to help a foreign entertainer reduce taxes while they perform in the United States, the program has become increasingly stringent and cumbersome.
In most cases, nonresident entertainers or athletes performing personal services or participating in performance events in the U.S. are subject to 30 percent withholding of gross income. A withholding agreement with the IRS may be entered into for reduced withholding provided certain requirements are met. Withholding agreements will generally call for withholding of federal tax to be used against the income tax liability on the annual tax return. If it is determined that the tour or tour leg will produce a loss, it is possible to avoid tax withholding on said event.
What does a CWA Do?
A CWA is an agreement between the foreign artist, the designated “withholding agent” and the IRS. The withholding agent can be the artist’s agent or manager, an accountant or an independent party whom the artist and IRS deem acceptable. A properly executed power of attorney form (Form 2848) will be required. All parties need to sign the agreement in order for it to be effective.
The IRS requires the artist to be in compliance with all required federal income tax returns and payment obligations. In the agreement, the artist agrees to timely file Form 1040NR (or Form 1040NR-EZ) for all the years required, including the year in which the CWA covers independent personal services. If the tour covers a period that spans additional calendar years or separate tour legs, more than one CWA may be required.
If the artist is approved for a CWA, withholding is based upon the budget provided and the net profits estimated as adjusted and negotiated by the CWA specialist assigned to the case and the withholding agent. The artist will then owe that estimate (as stated in the CWA) within a certain time period (typically 30 days) after the start of their tour. This often allows for more cash flow, rather than using 30 percent of their gross earnings every night to allot for taxes. This can be particularly helpful for smaller bands who need to fund their tour with their income.
Without a negotiated CWA, artists will have to wait until they file tax returns and show their tour income and expenses to get refunds on those taxes. Filing extensions and delays with the IRS can prolong the process further, and many times artists and bands will have to wait for months to get any of that money back. This cash flow crunch could prove devastating on small bands.
How to Apply for a CWA
Every time a band or artist goes on tour, a CWA application must be submitted to the IRS. Applicants must have filed and paid or made payment arrangements for all previous U.S. taxes.
The following information must be submitted at least 45 days prior to the first event on the tour, if applicable:
1. A list of the names and addresses of the foreign artist or band to be covered by the agreement.
2. Copies of all contracts that the artists or their agents and representatives have entered into regarding the time period and performances or events to be covered by the agreement, including, but not limited to:
a. Employers, agents and promoters
b. Exhibition halls
c. Individuals providing lodging, transportation, and advertising
3. An itinerary of dates and locations of all events or performances scheduled during the period to be covered by the agreement.
4. Copies of documents regarding all income streams, including, but not limited to:
a. Performance contracts, deals, or memos
b. Deal sheets or memos
c. Current recording contracts, deals or memos
d. Sponsorship contracts, deals or memos
e. Endorsement contracts, deals or memos
f. Merchandising contracts, deals or memos
g. Image and likeness contracts, deals or memos
h. Tour support and reimbursement documents
5. A proposed budget containing all gross income and itemized estimates of expenses for the period covered by the agreement.
6. The name, address and telephone number of the person the IRS should contact if additional information or documentation is needed. A Power of Attorney form must also be filed before the IRS can discuss the foreign artist or act’s tax requirements with a representative or withholding agent.
7. The name, address and Employer Identification Number (EIN) of the agent or agents who will be the central withholding agents for the foreign artist and who will enter into a contract with the IRS. When the IRS approves the estimated budget and the designated withholding agents, the IRS will prepare the CWA. The agreement must be signed by a designated withholding agent, the foreign act or artist covered by the CWA, and the authorized IRS representative.
Per the IRS, the withholding agent must agree to withhold income tax from the foreign artist’s earnings and to deposit the tax, on the dates and in the amounts indicated on the CWA, with the IRS. The withholding agent will also cause the payments of withheld tax to be reported on a Form 1042 account. Form 1042 and Form 1042-S must be filed by the withholding agent for each foreign artist covered by the CWA. The IRS will credit the withheld tax payments to the Form 1042 accounts.
Additionally, each foreign artist covered by the CWA must agree to file Form 1040NR or, if he or she qualifies, Form 1040NR-EZ. The foreign act then must attach all Forms 1042-S to his or her U.S. federal individual income tax return to get credit for the federal income tax withheld.
Here are some tips that can help a foreign artist or act be more successful in obtaining a CWA:
Keep track of documentation. A record of everything tour-related will be required, so create a system or hire someone experienced to manage all the statements, settlements, contracts, etc.
Submit paperwork on time. The IRS upholds its strict deadlines, and a completed application even one day late will most likely be ineligible. Documentation related to budgeted amounts will be required (quotes from vendors, airfares, hotels, etc., will likely be requested).
Make sure band members or the foreign act have a U.S. Social Security number. The IRS needs a Social Security number to withhold taxes. Without it, they won’t know where to allocate the money. The process with the Social Security Administration usually takes two to ten weeks. Without Social Security numbers, the IRS likely will not approve a CWA. In addition, a 30 percent withholding will be required for nonresident crew members who do not have a Social Security number, regardless of income tax treaty exemption. Social Security numbers are key in enabling the accountant to prepare and assist in filing tax returns for the band and, in some cases, crew members.
Applications can sometimes be up to 100 pages. Leave at least 60 days from the first show date for a withholding agent to complete the process prior to sending it to the IRS.
The bottom line is, be prepared. While a CWA can offer tax relief and help with cash flow during a leg of a tour, it requires a tremendous amount of documentation and cooperation from all parties involved. The IRS requirements for the application are known to change regularly, and because we are consistently told that the agency is severely understaffed in this area, there are often delays in getting CWAs approved. This can greatly impact a foreign artist or band’s financial health while on the road. That said, the right business manager can help mitigate the stress associated with this process and handle the details so the artist can focus on being successful on tour.
Victor Wlodinguer, CPA, is a partner in Citrin Cooperman’s Entertainment, Music, Media & Sports Group. He has more than 33 years of experience in the areas of business management, tour accounting, and tax consulting. As the practice leader of Music & Family Business Management, he advises some of the most renowned artists, composers and touring acts in the music industry, as well as actors in film, theater and television, writers, personal managers, agents and production companies. He often serves as a withholding agent for many of his clients.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access