Removing US Withholding Tax from your royalties (Part 1)

Intro and disclaimer: I am a UK-based writer. Towards the end of 2012 I began proceedings to strip US Withholding Tax from any royalties earned through US companies. This short series of blog posts documents the process I followed. The usual caveats apply: this is the internet, folks, so you shouldn’t consider this to be professional advice. That said I hope you still find these posts of use. Okay, let’s get stuck in.

Part One: US Withholding Tax – if you don’t need to pay it, don’t pay it!

If you are a non-US resident then companies like Amazon and Smashwords are required by law to withhold 30% of the gross payment to you and hand it over to the IRS. This is US Withholding Tax and it is essentially a default setting to make sure Uncle Sam gets paid when a non-US resident earns a slice. The tax applies to interest payments, dividends, rent payments, and, among other things, royalty payments.

The trouble with this arrangement, however, is that you can get stung for tax twice: once by Uncle Sam and again by the taxman in your own country. For example if you are a basic-rate taxpayer in the UK and you earn $100 through Amazon, Uncle Sam will take his $30, and you will owe the UK taxman 20% of the $70 remaining, leaving you with $56. That $56 equates roughly to £35. Once your bank has charged you a £5 processing fee to pay in a US$ cheque and then applied its terrible exchange rate on the remainder you end up with approximately Bugger All.

(I have assumed the worst-case scenario here, namely UK tax applied immediately after US Withholding Tax. It may be that UK tax can applied on the monies you finally get from the bank, but I’m no accountant. It’s a moot point either way, as you will discover.)

This double-taxation of your hard-earned royalties is, of course, is a trifle unfair, but fear not! Many countries have a tax treaty in place with the US that allows non-US residents to waive all or part of the Withholding Tax. In order to do this, however, you need to be on Uncle Sam’s books.

In short, you’re going to need a US tax number. You can apply for one by completing a W-7 form from the IRS if you are an individual, or, if you have structured your tax affairs within a company, then you’ll need to complete a SS-4 form. (This series of posts will only cover the process from the perspective of an individual non-US resident. Amazon KDP’s help page has more info on completing the SS-4 form.)

It will take 7-8 weeks for the IRS to process your application and to issue a tax number. For example I submitted my application late October 2012 and received my Individual Taxpayer Identification Number (ITIN) early December 2012.

Once you have received your tax number you can then apply to have the US Withholding Tax waived or reduced from your assorted income streams. For that you will need to complete and submit a W-8 form to each US-based publishing platform you use. Bingo! More royalties for you, and a little more tax into HMRC’s coffers to boot. Your social conscience may rest easy again. (You were, of course, going to declare that extra source of income, weren’t you?)

Okay, that’s a run-through of what the tax is and what you need to do in order to reduce or remove it from your earnings. I’ll go into more detail on these steps in subsequent posts.

Coming next: Applying for a US Tax Identification Number

Final note: If you see anything that is incorrect in any of these pages please let me know. It’s not my intention to misinform!