The United States craves entertainment and reveres talent, making the country a fertile source of income for foreign entertainers and athletes. Such income often comes from performances or professional competitions, but celebrities also earn income from endorsements.
The taxation of income earned in the U.S. by an entertainer or athlete who is not a United States citizen or resident can pose vexing problems. Whether a nonresident’s income can be taxed by the United States depends on the specific facts, which should always be reviewed with a tax attorney.
It is nevertheless helpful for athletes and entertainers to have a general understanding of the principles that govern taxation of the income they earn in the United States.
Taxation of Services
When a foreign resident is compensated for services performed in the United States, the compensation income is subject to U.S. income taxes at the graduated rates applicable to American taxpayers. A foreign resident who plays on an American basketball team, a singer who resides in another country but performs in American venues during a world tour, or a foreign celebrity who charges an appearance fee to attend an American event, will likely be taxed in the U.S. on the income derived from those services.
All forms of income for services performed in the United States are subject to taxation, including wages and salaries, fixed fees, commissions, and prize winnings. For example, a boxer who wins a boxing match will be taxed on the amount of his winnings, while a performer who is paid a percentage of the “gate” will be taxed on the compensation she receives.
Taxation of Royalties
When celebrities agree to endorse a product, they may or may not be paid for performing a service. In addition to compensation for services, celebrities may receive royalty payments that are tied to sales of an endorsed product in the U.S. Royalties are taxed differently than compensation for services.
The general rule is that royalties earned by foreign residents for use of their brand or other intellectual property within the United States are subject to a 30% withholding rate rather than a graduated tax rate. However, income tax treaties between the U.S. and certain foreign countries reduce the rate of taxation on royalty income to a rate less than 30%; and some treaties reduce the rate applicable to royalties to 0%. Therefore, there is a strong motivation for persons resident in certain nations to maximize the portion of their endorsement income characterized as royalties.
One cannot unilaterally make this characterization of income as wages versus royalties. However, with proper planning it is possible to optimize the tax characterization. Therefore, it is important that a nonresident celebrity engage a tax attorney prior to entering into an endorsement contract.
Additional blog posts will explore these difficult distinctions in more detail. At this point, nonresident athletes and entertainers should take away three key points: (1) earnings for services performed in the United States are generally taxable; (2) earnings from endorsement contracts may, at least in part, be taxable at a lower rate as royalties; and (3) some royalty income may not be taxable in the United States at all.