Welcome to the United States! Now is the time to pay your taxes. Equestrian professionals such as jockeys, show jumpers, trainers, or horse owners who travel to the United States to work or compete may not be aware of the tax implications of their activities in the United States. Failure to comply with US tax laws can result in significant tax liabilities, penalties, and interest. It is therefore important to consider these issues early on.
Taxation depends on the status of tax residence
A horse professional’s tax residency status determines his or her U.S. tax return requirements. Although the US Immigration Act identifies several categories of immigrants (see Part I and Part II of the previous GT Immigration / Equine Alerts), US tax law only distinguishes between “resident aliens” and “non-resident aliens”. The distinction is important because resident foreigners and non-resident foreigners have different tax filing obligations. An individual will be treated as a resident alien if he or she: (i) is granted a green card to permanently reside in the United States; or (ii) has a substantial presence in the United States. Generally, everyone else is treated as a non-resident alien.
Whether a horse professional has a significant presence depends on a complex formula that takes into account not only the time spent in a current year, but also the time spent in the past two years. Therefore, they should consult a U.S. tax advisor each year to determine their residency status. This status can change in any given year, depending on how much time the horse professional spends in the United States. Therefore it has to be checked annually. Maintaining good records is important to keep track of the number of days the equestrian professional is present in the United States. For the essential presence test application, the day count does not include the time a professional athlete spends in the United States attending nonprofit sporting events, but generally includes all other days (and fractions of days).
Registration requirements for resident foreigners
Horse professionals treated as resident aliens have the same federal tax return requirements as U.S. citizens. This means that they are required to report their worldwide income and pay taxes, not just income that originated in the United States. This is a trap for the unwary as most countries have territorial tax systems that only control the tax revenue generated in that country. Resident alien filing requirements may include: (i) Form 1040, US Income Tax Return; (ii) a gift tax return to report material gifts made during the year; (iii) FinCEN Form 114 (FBAR) for reporting ownership or signing authority to banks, brokers, or other financial accounts held outside the United States; and (iv) various overseas returns to report interests in or transactions with companies, partnerships, trusts, or other companies located outside the United States. Failure to comply with reporting requirements can result in significant penalties. The IRS often aggressively pursues these penalties whether or not an individual is familiar with the US tax system. A horse professional can also have state tax declaration obligations in the states in which he lives, provides services or takes part in riding events. Therefore, they should carefully examine which reporting requirements apply to them.
Registration requirements for non-resident foreigners
Non-resident aliens are required to report on a Form 1040-NR: (i) income effectively connected to a US trade or business and subject to graduated tax rates; and (ii) US source income that is subject to a flat tax rate of 30% (unless a lower tax rate applies under a tax treaty). Income from US sources may include wages, prizes or awards, commissions, performance compensation, advertising income, royalties, income from horse sales, stud fees, and purses for races. A non-resident alien should carefully check what income should be reported and whether he or she is entitled to benefits under a tax treaty.
Requirements for the retention of employers
US employers who hire equine workers from abroad should also be aware of their US reporting and withholding tax obligations. Whether a US employer has a withholding tax liability depends on whether the horse professional is an employee or an independent contractor. In general, U.S. employers are required to withhold income tax, withhold and pay Social Security and Medicare taxes, and pay federal unemployment tax on wages paid to an employee. Withholding tax requirements differ depending on several factors including: (i) the status of the employee as a non-resident alien or a resident alien; (ii) the type of visa the employee holds; and (iii) whether a tax treaty applies. Failure to properly withhold wages and pay taxes to the IRS can result in significant penalties. Employers have similar withholding tax responsibilities under state law. State reporting requirements become more complex when the services are provided in multiple jurisdictions, as is common in the equestrian industry. Therefore, US employers should certify that they are properly withholding.
There are significant opportunities for equine professionals in the United States. Regardless of whether they come here permanently or regularly, they must carefully consider their status as tax resident and the applicable requirements for filing applications at the federal and state levels. US reporting requirements appear to go against the common sense of those accustomed to territorial tax systems. The often overlapping and inconsistent government reporting requirements add to the burden. To avoid a costly and time-consuming audit, equine professionals and employers should carefully consider how US and state tax laws will affect them.
© 2020 Greenberg Sad, LLP. All rights reserved. National Law Review, Volume XI, Number 68