Many churches are operating on a remote basis right now, with the limits on travel and gathering still in place. This can cause difficulties for administration by limiting special events that would otherwise bring new members through your doors. However, it does open up incredible opportunities to change things up by having guest speakers scheduled for online services, including those from outside of the United States.
Things are still different in the processes that usually accompany hosting a guest in your church. Instead of covering their travel expenses to fly them into your city, you ask them to video stream themselves into your services. This makes things so simple! The only question that needs to be asked and answered before inviting someone to speak at your church is: how do you make sure they get paid and properly? Let’s look at the facts.
Types of Payments
The general rule for contractors is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
An honorarium is a payment to an individual for a presentation-oriented, guest lecture, or invitational event.
A love offering is a gift for the individual given out of love and gratitude for their presence, covering travel expenses and cost of equipment/materials, etc.
All of these payments would generally be reported on a 1099 Form for a contractor inside the United States, and these are the types of payments that we will be looking at providing reporting on.
Withholding Taxes
When a U.S. citizen is paid by an employer, taxes are withheld from their paychecks. This isn’t done with contractors, though, so what are the rules surrounding payments to foreign individuals?
Publication 515 from the IRS states:
“In most cases, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person’s country of residence and the United States. The tax is generally withheld (Chapter 3 withholding) from the payment made to the foreign person.”
In short, even though your guest resides in another country, the payment they receive is subject to U.S. taxes. These should be withheld and submitted by the withholding agent, which is designated in the same publication as “a U.S. or foreign person, in whatever capacity acting, that has control, receipt, custody, disposal, or payment of an amount subject to Chapter 3 withholding. A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies.”
But how much needs to be withheld? For purposes of Chapter 3, in most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following.
• The payee is a U.S. person.
• The payee is a foreign person who is the beneficial owner of the income and is entitled to a reduced withholding rate under the Code or an applicable income tax treaty.
Now that we’ve established the basics, let’s look at the paperwork you will need to ensure that you have everything you need when it comes time to send tax information out to contractors.
What Forms Are Needed?
When hiring a contractor, you provide them with a Form W-9 to record tax information. In this case, a foreign payee of the income should usually fill out and turn in something the Form W-8 series. The foreign person can give you documentary evidence rather than a Form W-8 if certain requirements are met. Generally, we see Form W-8BEN, which is now used exclusively by individuals. These forms will provide the organization with the person’s legal name and address, and asks for any exemptions that will be claimed.
You may need additional forms and documents if the guest speaker is entitled to claim any Tax Treaty exemptions.
What Is a Tax Treaty, and What Do I Do With It?
Publication 515 defines that “the United States has bilateral income tax treaties, also known as “conventions,” with many foreign countries. Under this code, residents (sometimes limited to citizens) of those countries are taxed at a reduced rate or are exempt from U.S. income taxes on certain income received from within the United States.
Income that is exempt under a treaty is not subject to withholding at source under this publication’s statutory rules.
First published on StartChurch.com. Used by permission.