We awarded prizes of $100 and $300; are these withholdable? Do I need to report them? These were given to high-performing salespeople at Canadian vehicle dealerships we sold vans to. They're Canadian citizens working in Canada.


We contacted both Canadian and U.S. tax authorities. It looks like you do have to withhold 30% on the payments and report them on 1042-S forms, according to IRS agent Ms. Welsh (# 1000349302).

Ms. Welsh believes the payments of $100 and $300 fall under the category of prizes, which require withholding, rather than wages, which might have made them exempt under the U.S.-Canada tax treaty. You’ll have to file a Form 1042-S Foreign Person’s U.S. Source Income Subject to Withholding for each person who receives a prize, and you’ll have to request that each recipient fill out a W-8 form. The recipients can use their Canadian taxpayer identification numbers on the forms.

Foreign payments are a complex area, and even the IRS’s information specialists sometimes tell us to contact a tax attorney. This could be such a case were the total amounts involved significant enough—an argument could be made that the “award” is actually a kind of bonus and in fact payment for services (i.e., selling vans)—in which case, while still reportable and potentially withhold-able, could mean that the payees could submit form 8233 and claim the tax treaty with the U.S., and thus avoid withholding.  However, the amounts here might not be worth attorney consultation.  The safe route then would be withhold and report, and you have an IRS information specialist who has recommended this course.

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