UK Indie Authors - Tax on US royalties

If you are a non-US citizen and you have self published your books in the US, you will already be aware that there is a 30% withholding tax applied by the distributor, and if you’re selling a reasonable number of books, that could be quite a bit of money!

But you CAN do something about this.

I put it off for far too long, and when I eventually got around to it, I found a website with a great article by Karen Inglis – and I followed her instructions to the letter. The whole process was straightforward, and so I thought I would ask her to write a post for me to share with you.

I should point out that I made the decision a few months ago to form a company for my publishing activities. That may or may not be the right way to go for you – it depends on a number of factors and the best person to advise you would be your accountant – but it certainly made it a whole lot easier to deal with the procedures in the US, as you will probably see from Karen’s article.

I hope it proves as helpful to you as it did to me.

Tax on US Royalties

When I set out to publish my first children’s book The Secret Lake in 2011 I quickly became aware that I needed to understand how to get a US tax number – because without it my print and e-book sales in the US would have US tax deducted from them.

At that time there was precious little written about this on blogs so I decided to rectify the situation. It was hardly the most glamorous of blog posts (!) – but I’m pleased to say that many indie authors have used it and continue to thank me for pointing them in the right direction!  I’m therefore delighted to share my story here on Rachel’s blog

How does tax on US royalties work?

In short, if you are a non-US author your royalties from your US book sales will be subject to a 30% withholding tax unless you complete the necessary paperwork to claim full or part exemption. The amount of exemption you can claim depends on the tax treaty your country has with the US.  If you’re based in the UK the withholding rate is 0%, so you can claim full exemption if you wish. (In this case, you then declare the foreign income on your UK personal or company tax return and pay tax on it in the UK.)

You can check which countries have a tax treaty with the USA here.  The withholding rates aren’t easy to work out from here so it’s probably best to ask your own tax department – they will know!

How to claim reduced or no US withholding tax

The key steps you need to take are:

• Obtain a tax identification number – called an ITIN (Individual Tax Identification Number) for individuals or an EIN (Employer Identification Number) for businesses, including sole traders.
• Complete and send a form W8-BEN, which includes your US tax ITIN or EIN, to each of your US distributors – they will then be able to pay your royalties in line with the exemption amount instead of automatically withholding 30% tax. (You can probably ask them to defer paying you any royalties until they have the form.)

It takes just half an hour to get an EIN if you’re a business. A business for these purposes can be either a limited company or a self-employed sole trader if you are outside the USA. (NB If you want to count yourself as a UK sole trader you need to register with HM Revenue & Customs as self-employed.)

Getting an individual tax ITIN takes many weeks, so make a start as soon as you can if going this route – and it seems they’ve recently changed the rules, which means it takes even longer than it used to as they want to send all of your original documents to Texas!   I’ll start with the EIN as this is the route I took and know first-hand.

How to get an EIN if you’re publishing as a business / sole trader

• Download form SS-4 from the IRS website (PDF)
• Read the notes on page 2 of the form – these confirm which questions you can miss off since you are only applying to get this EIN for tax withholding purposes.
• Complete the form – you can fill the fields in online and then save and print the form. (See the ‘Tips’ section below for answering question 9a.)
• Next call the IRS’s dedicated line for businesses that are located outside of the US: 1-267-941-1099 (not toll free). You need to have your completed form SS-4 beside you as they will ask you about your entries. (see the ‘Tips’ section below for how to avoid being asked to fax the form.)
• They then give you the number over the phone and say to expect it and relevant paperwork in the post in the next 2-3 weeks. And it does…
• Download and complete form W8-BEN (PDF) – be sure to enter your EIN on it.
• Send form W8-BEN to your distributors in line with their instructions.

NB: non-US businesses cannot apply for an EIN online, so ignore any instructions you see on this as they are directed at US corporations.

 Tips for completing form SS-4 and calling the IRS

• On form SS-4, at question 9a tick ‘Other’ and enter either ‘Limited Company (UK) or ‘Self employed sole trader – UK’ – or the equivalent set-up in your country. The only other possible option at 9a would be to tick ‘corporation’ or Sole proprietor (SSN)– which seems to refer to US business structures.
• When you call, make it clear that you are the sole proprietor/director of the business. If you don’t they will ask you to fax the form while you are on the phone – not easy if you don’t have a separate fax.  In my case they said that since I owned the business there was no need to fax the form.
• Have the date of incorporation of your company / the date your started your sole proprietor business to hand. Even though their page 2 instructions said I didn’t need to fill in that info they still asked me for this.  I guess on that basis you will need to have the date you registered as self-employed to hand if you are a sole trader.

You can find general instructions for completing form SS-4 here.

How to get an ITIN if you’re publishing as an individual

This process requires you to take or send your passport to the US embassy if you are British. Here’s a brief summary but I’ve added a link to the blog of another UK author who describes the process in detail. (I have an EIN so didn’t use this method.)

• Request an original hand-signed letter from your US book distributor or publisher, addressed to the IRS, which states that you need an ITIN because you are going to receive royalties and wish to apply for a US withholding tax exemption or reduction. (Your distributor probably has a process for issuing these letters, and may make a small charge. But it can take time: for example, Smashwords says that it can take them 3-6 weeks to snail mail the letter to you.)
• While waiting for your letter, download and compete form W-7 from the IRS website (PDF). (Here are instructions for completing form W-7.)
• If you’re based in the UK, take (or send special delivery) your completed W-7 form, your distributor’s hand-signed letter, and your passport to the American Embassy in London.  They need to see your passport as evidence that you are British and they need the hand-signed letter to prove that you are being paid by an American company. Copies won’t be accepted.
• Now for the bad news – it seems that new rules introduced in the summer of 2012 mean they now need to send your original documents – including your passport! – to Texas for processing! This can take six weeks or more which is more than a worrying length of time to be without a passport. However, I have also read in the comments section on UK author Scarlett Parrish’s blog that they will be prepared instead to send off your original Photo ID Driving Licence provided you also have taken along or provided your passport and birth certificate as evidence of your identity….go and read that blog to find out more.
• Your documents and ITIN are returned after somewhere between 6 weeks and 2 months as far as I can see.
• Once you receive your ITIN, download and complete form W8-BEN (PDF) – making sure that you include you ITIN on it. (The form is dated 2006 but seems to be the most recent.)
• Now send your completed form W8-BEN to your US distributor/s in accordance with their instructions. Once they have this they can pay your royalties without applying the full 30% witholding tax.

Best of luck!

Karen Inglis

www.kareninglis.com

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