Inspired by well-known athletes and entertainers, such us soccer player David Beckham, or Mexican Oscar winners Guillermo del Toro and Alejandro G. Iñárritu, new generations of foreign athletes, actors, producers, and entertainers have come to the U.S. hoping to make their mark as well. However, foreign athletes and entertainers may encounter issues with the IRS if they are not fully aware of their U.S. tax obligations. In determining their income tax obligations, the IRS will look to whether the athlete or entertainer is a resident for federal income tax purposes.
Generally, U.S. citizens and permanent resident aliens are considered U.S. tax residents and subject to federal income tax on their worldwide income. However, even non-residents aliens can be considered U.S. tax residents if they spend the requisite number of days in the U.S. This is called the substantial presence test. Individuals meet this test by being present in the U.S. for a period of 183 days or more in any given year. In addition, the substantial presence test is met if the individual is present for at least 31 days in a year and his/her presence in that year when added to one-third of the days present in the year prior and one-sixth of the days present in the second prior year equals 183 days or more. If the individual satisfies this test, then the individual is deemed a tax resident for that taxable year. Athletes and entertainers considered U.S. tax residents are subject to U.S. income tax on their worldwide income. This result can be financially devastating, since they are globally mobile individuals who can earn substantial amounts of money in several countries.
Foreign athletes and entertainers who are considered non-residents for U.S. tax purposes are only subject to U.S. income tax on compensation received for services performed in the U.S., as well as royalties, rents from investments in real property, dividends, interest, and income derived from U.S. business operations. Nonresident alien entertainers or athletes performing independent personal services or participating in athletic events in the U.S. are subject to a 30% withholding on all payments made to them. However, certain exceptions apply.
An athlete or entertainer, who fails to comply with his/her U.S. tax and filing and reporting obligations can be subject to substantial penalties. In addition, running afoul of U.S. tax laws may result in loss of work visas. Further, where the IRS has assessed income tax, an athlete or entertainer may not be permitted to leave the United States until federal tax liability is satisfied.