Do Foreign Athletes Pay U.S. Taxes?
Navigating U.S. tax rules can be complex for foreign athletes. This guide clarifies how tax residency, income sourcing, and international agreements impact their obligations.
Navigating U.S. tax rules can be complex for foreign athletes. This guide clarifies how tax residency, income sourcing, and international agreements impact their obligations.
The U.S. tax system for foreign athletes is complex, as tax obligations depend significantly on an individual’s U.S. tax residency status and income source. Income earned within U.S. borders is generally subject to U.S. taxation. This article clarifies how U.S. tax residency is determined, what types of income foreign athletes earn that are subject to U.S. taxation, and their filing requirements.
Determining U.S. tax residency is a foundational step, as it dictates an individual’s U.S. tax obligations. Foreign individuals are classified as either resident aliens or nonresident aliens for tax purposes. This classification is established through two tests: the Green Card Test and the Substantial Presence Test.
The Green Card Test is straightforward: an individual holding a U.S. lawful permanent resident card is considered a U.S. tax resident. This status subjects their worldwide income to U.S. taxation, similar to U.S. citizens.
An individual without a green card may still be a U.S. tax resident if they meet the Substantial Presence Test. To satisfy this test, a person must be physically present in the United States for at least 31 days in the current calendar year and 183 days during a three-year period. This three-year calculation includes all days present in the current year, one-third of the days present in the first preceding year, and one-sixth of the days present in the second preceding year.
Even if an individual meets the Substantial Presence Test, they might be treated as a nonresident alien under the Closer Connection Exception. This exception applies if the individual was present in the U.S. for fewer than 183 days in the current year and can demonstrate a closer connection to a foreign country where they maintain a tax home. To claim this exception, Form 8840, “Closer Connection Exception Statement for Aliens,” must be filed with the IRS.
For certain individuals, a First-Year Election may be available. This election allows them to be treated as a U.S. tax resident for a portion of their first year in the U.S., which can sometimes be beneficial, impacting how their income is taxed for that initial period.
The types of income a foreign athlete earns and its source determine how it is taxed in the U.S. U.S.-source income is generally earned within the United States, while foreign-source income is earned outside the U.S. For nonresident aliens, only U.S.-source income is subject to U.S. tax.
Income for nonresident aliens is categorized into two main types: Effectively Connected Income (ECI) and Fixed, Determinable, Annual, or Periodical (FDAP) income. ECI is income directly linked to a U.S. trade or business, such as compensation for personal services performed in the U.S. Examples include salaries for games played in the U.S., prize money from U.S. competitions, and endorsement income attributable to U.S. activities. ECI is taxed at graduated rates, similar to those for U.S. citizens and residents, and allows for certain deductions.
FDAP income refers to predictable and periodic earnings, often considered passive income, such as interest, dividends, rents, or royalties, not effectively connected with a U.S. trade or business. This income is subject to a flat 30% tax rate on the gross amount, unless a tax treaty specifies a lower rate. No deductions are allowed against FDAP income.
Salaries and wages from U.S. teams are generally ECI if services are performed in the U.S. Prize money from U.S. events also falls under U.S.-source ECI. Endorsement income can be sourced based on where services are performed or rights exploited. Other income sources like signing bonuses or royalties are also subject to these sourcing rules and ECI/FDAP classifications.
Tax treaties are agreements between the United States and other countries that prevent double taxation and outline specific rules for various income types. For foreign athletes, these treaties can reduce or eliminate their U.S. tax liability. Many U.S. tax treaties contain specific articles addressing income earned by athletes and entertainers.
These treaty provisions may allow for reduced withholding rates or exemptions from U.S. tax, provided certain conditions are met, such as specific income thresholds or if the athlete is employed by a foreign entity. To claim these benefits, foreign athletes submit Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals),” to their payers.
Beyond federal income tax, foreign athletes must also consider state income taxes. Many states impose income tax on income earned within their borders, meaning an athlete may owe tax in multiple states where they compete or perform services. State taxes apply in addition to federal taxes and vary by state.
Social Security and Medicare taxes, known as FICA taxes, may also apply. Foreign athletes are subject to FICA taxes if they are U.S. residents for tax purposes or if their income is effectively connected to a U.S. trade or business and not exempt by a tax treaty. Certain non-immigrant visa holders may be exempt from FICA taxes for a specified period.
Foreign athletes may deduct business expenses against their effectively connected income. Deductible expenses include agent fees, training expenses, equipment, and travel costs related to their profession. These deductions reduce their taxable income, lowering their U.S. tax liability.
After determining tax residency, understanding income sourcing, and considering treaty benefits, foreign athletes must fulfill specific U.S. tax filing obligations. The primary tax form for nonresident aliens is Form 1040-NR, “U.S. Nonresident Alien Income Tax Return.” This form reports U.S.-source effectively connected income and claims applicable deductions or treaty benefits.
If a foreign athlete is a U.S. tax resident, through the Green Card Test or Substantial Presence Test, they file Form 1040, “U.S. Individual Income Tax Return,” similar to U.S. citizens. This form requires reporting of worldwide income. Other forms may be necessary, such as Form 8840 if claiming the Closer Connection Exception, or Form 8833 when taking a tax treaty position that affects U.S. tax liability.
The standard tax filing deadline for nonresident aliens filing Form 1040-NR is generally April 15th for calendar year filers. For non-employees or those without a U.S. office, the deadline can be June 15th. Extensions to file can be requested, pushing the deadline to October 15th, though any tax owed must be paid by the original deadline to avoid penalties and interest.
U.S. tax is often withheld from an athlete’s income throughout the year. For nonresident aliens, this withholding might be at a flat 30% rate on FDAP income or a reduced rate if a treaty applies. For ECI, withholding occurs through regular payroll processes. If withholding is insufficient, athletes may be required to make estimated tax payments quarterly to the IRS. Athletes should expect to receive information returns such as Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” or Form W-2, “Wage and Tax Statement,” which detail their income and any taxes withheld.