Withholding Tax USA: Author Brian Lawrenson shares his guide

If you are an author who is interested in self-publishing Amazon seems like a logical avenue to explore. Let’s face it, it’s got the ‘name’ and perhaps it seems like a measure of success to have your content available for all the world to read. Because Australia is behind the US in ebook sales they have many ‘names’ that an author will consider when self-publishing including Lulu or Smashwords. But there is one issue that I don’t hear discussed a lot when considering dealing with US companies, and it’s a fairly BIG issue. A ‘30% of your sales income‘ kind of issue. For authors outside the US you need to understand how to overcome the hurdle of withholding tax. While in theory you’d think this is simple in practice  it can be quite tricky and involved. If you don’t do it exactly right then you’re back to square one.

Today Brian Lawrenson shares with us his experiences of navigating the problems of Withholding Tax for Non-US Authors. Brian has put together this guide to help others. 

Question: Congratulations, Brian. You are an Australian author who has been making good money out of ePublishing but have found frustrations in dealing with overseas taxes. What have you learned about the process?

Brian Lawrenson:  If you are, or are thinking of, earning money in the USA and you are a non-resident, you will find that you encounter some frustrations as your business grows. I would have loved to have had a simple guide that took me thought the steps that ending up with me paying minimum USA tax. That’s why I put this guide together.

Now, upfront, I should tell you that I’m not an international tax expert and once your earnings rise to substantial levels, it would be prudent for you to consult the appropriate tax professionals.

I have four significant cash flows in the USA and a number of casual ones. For a while, I struggled to understand why 30% of my earnings were being withheld. Then in one month when I had almost $2,000 withheld, I decided to use Google to find out exactly what I needed to do to change this situation. This is about what I’ve learned from the process. I hope that you’ll find it helpful, too.

Question: Who can earn money in the USA?

BLIn simple terms, just about anyone. So if you are a book author that is not resident in the USA, a music composer in Canada or an ebook author in Australia, or anywhere else, these comments should be helpful. All you need to be able to do is sign-on as a overseas (foreign) seller of books, eBooks, audio material, Internet Marketing or software products, including affiliates, to the likes of Amazon, Clickbank, Barnes and Noble, Lulu Publishing, CreateSpace Publishing and others.

All of these organisations have Terms and Conditions that you should print out and read before starting up your business. You will need to determine whether you will operate as an individual (or sole trader) or a company. The rules for these vary slightly. You should also note the basis of paying commissions/royalties and how they are paid. Many of the companies, distributors, have minimum earnings before they will send you a payment. Some, like the eBooks distributor, Smashwords, allow you to nominate that royalties are to be unpaid until the withholding tax exemption process is completed.

It doesn’t matter how you receive your payments, you will need to follow the procedures in this document. Some organizations pay by online means such as Paypal. Other like Amazon will send you a cheque in US currency. Most major banks will allow you to deposit US funds converted into local currency but you do pay a higher than normal currency conversion rate, and in some cases, bank charges.

You can establish, with a little difficulty, a US bank account but this does not remove you from the need to establish yourself in the US tax system.

To further complicate the tax issue, in the USA, a number of states operate different levels of sales tax. I have used the term VAT in this document. In broad terms most distributors deduct the VAT from your sales price before calculating the commission or royalty but some add it to the sales price. This can be complex and is not the main subject here. If your earning are substantial, it might be worth to consult a US Tax agent to assist with minimising state taxes.

Question: What do you do when you’ve made your first sales?

BL:  When you’ve been notified that you’ve made your first earning, over any minimum that applies, then it is the time to start the withholding tax exemption process. Otherwise all payments will be made to you less the 30% withholding tax. Start by contacting the distributors support team and ask them to send you a letter confirming that you have earnings. This is required before you can apply for a USA Individual Taxpayer Identification Number (ITIN). If you operate a company there is a variation of the procedure. The ITIN application process takes about two months. If you operate using a company the same form is used but you need to code the form with an Employee Identification Number (EIN).

Now you have to complete a Form W-7  from the Internal Revenue Service (IRS), attach the letter and proof of your identity and send the documentation by mail to the IRS. Use Google or the hyperlinks we’ve included to find the forms and download them together with their guides.

Question: How do you apply for an ITIN Number?

BL: Once you receive the letter from the distributor confirming that you have income, you need to download a Form W-7 from the IRS website.

Form W- 7 – Instructions for completing Form W – 7

Now you need to provide proof of your identity and national residency. The simplest way to do this is to send a copy of your passport. But it needs to be certified by a Registered Notary. This will cost. You need to get the noted copy them stamped as an Apostille. This generally can only be done by the organisation that issued the passport. If it is practical, it is quicker if you make the application in person. Check with your passport office for the process and cost.

In Australia, the Apostille application process takes two days if you take your passport and the noted copy of it to your local Passport Office. There is a charge of about $40. The passport office understands what an Apostille is.

Once you have the notated copy of your passport stamped with the Apostille, copy it and send the original with the Form W- 7 and the distributor letter to the IRS. The only address that I have is:

Internal Revenue Service
Austin Texas TX 73301-0057 USA

Check the IRS website and W- 7 form for updates to this.

The mail package does not need to be registered. If you don’t follow these procedures precisely, it is likely that you’ll get a letter asking you to resubmit the package again. This means that you have to go through the whole process again.

Question: What do you do once you receive your ITIN or EIN?

BLIf all goes well you will receive a letter from the IRS that contains your ITIN. I suggest that you make a number of copies of this document.  If you operate via a company, the form will be an EIN.

You now need to complete a request to each distributor to ask them to reduce the withholding tax to your Treaty Tax rate. This is achieved by completing an IRS Form W-8BEN and sending this together with a copy of the ITIN (or EIN) letter to the distributor. They will then make application to the IRS to reduce the tax to the Treaty Tax rate. Currently for Australia this is 5%. This seems to take about a month and you should receive confirmation about this from your distributor.

They may even send you a payment of any withheld taxes at the 30% for the current tax year.

Form W-8BENHow to complete a Form W-8BEN. Follow the instructions that can be found with the form at the IRS website.

Question: What do you do next?

BL: After you have received confirmation from your distributor that they have updated your tax status, as further payments are received, you should check that the revenue is calculated after the deduction of the Tax at your Treaty Rate. If there is an error contact the support desk at the distributor.

Question: How do you get your back taxes refunded?

BL: The USA Tax year operates from January to December. Early in the new year your distributor will send you a copy of your earnings for the year. This information is provided on a Form 1042-S. To request a refund, or to meet your obligation to file a US tax return, you then need to complete an Internal Revenue Form 1049NR – U S Non-resident Income Tax Return. It is quite involved but just needs stepping through question by question. The date for the last return is April 15th. There can be penalties for a late return. A month or two later, you will receive a tax refund cheque, as appropriate.

Guide to Withholding Tax kindly provided by, Brian Lawrenson, Author.

Following Marco Polo’s Silk Road

and 30 eBooks for travel lovers.

email: blawrens@bigpond.net.au

Visit his website for more details or view his books on Amazon or Smashwords.

Disclaimer: This guide has been posted for the benefit of non-US authors who need to know how to manage tax in the US. The content has been provided by Brian Lawrenson and has not been verified by this blog or blog owner. It is recommended that authors use this as a guide only and consult their own tax advisors in their country of residence and/or country of sales income.

8 thoughts on “Withholding Tax USA: Author Brian Lawrenson shares his guide

  1. OMG this is almost overwhelming. Thanks to you Anna Maguire for posting this comprehensive summary. And thanks to you too, Brian Lawrenson for sharing the journey. I hope your cheques are huge after so many bites have been taken out of them! It’s daunting.
    Thanks – Digireado does it again.

    • Thanks for your comment Jennifer. I agree, it’s a complicated process and I know of at least one Australian author (I’ll post her story tomorrow) who found this a huge obstacle. And yes, Brian Lawrenson has been wonderful in allowing us to share the knowledge that he has gained.

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  3. This is brilliant help, but alas did not answer my question which comes under Reason for applying (I’ve been knocked back once for not filling this part in correctly) The form says I must enter the name of the treaty country and treaty article number in the appropriate entry space below box h (which contains the information ‘Exception No.1.d royalties’ followed by More details on tax treaties, see Pub.901
    Does anyone know where I can find a copy of these tax treaties so I can look up Pub.901? Its costing me a fortune to telephone Texas and they are not helpful. Patricia Bernard, patriciabernard@iinet.net.au

    • Hello Trisha and thanks for reading the post and asking your question. In short, no, I don’t know. But I WILL ask around and if I get the answer I’ll contact you directly and post the answer. If you get the answer would you be kind enough to post in the comments? Hope we can work this out! Anna

    • I checked out online (as I got knocked back the first time for the same reason) and found the instructions for filling out the W7 form. Country is Australia and article number is 12; Royalties – I think!

  4. Pingback: Getting the most from US ebook sales (including Amazon): Overcoming the hurdle of US withholding tax – Digital Publishing Australia

  5. I am in the process of signing up with small publisher. One of the stipulations is that I take care of my own tax – I have no idea how to do that. I have already sent my application away for an ITIN for Createspace, so I can submit my W8ben to take advantage of the tax treaty for Australia. But if I have to pay my own tax directly to the IRS, I am totally lost….

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