We pay a Canadian who teaches a seminar in Canada. Does he/she need to fill out a W-8? Do we need to withhold any tax? If a Canadian teaches in the U.S., does he/she need to fill out a W-8 and do we need to withhold any tax?

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Q. (cont.) At year end, what form do I need to send to the IRS and the vendor?

A. We are assuming your company is based in the U.S., and you are paying Canadian citizens for teaching services performed in both the U.S. and Canada. (That your company is non-profit does not change your responsibilities regarding payment reporting and withholding.)  We will answer your question on that basis.

If the vendor is a Canadian citizen and the services were performed in Canada, then no reporting is required. The payment is “non-U.S.-source income.”

In those instances where the Canadian citizen provided teaching services in the U.S., however, these payments must be reported (“U.S.-source income”). The vendor will want to claim the Canada tax treaty benefit that allows you to exempt him from tax withholding. In order to do that, he will need to fill out and submit to you a Form 8233. (In order to claim the treaty benefit, the vendor must have a U.S. taxpayer identification number (TIN). He can obtain one from the IRS, even if he isn't a U.S. citizen.)

Once you receive Form 8233, you have five days after the services were performed to submit it to the IRS, and they will respond back within 10 days after receipt to let you know if the vendor is eligible for tax treaty benefit. This will determine whether or not you are obligated to withhold the 30 percent from the payment.

At the end of the year, you'll need to send the vendor a Form 1042-S, showing the payment and any amount withheld, and a Form 1042-S (and form 1042 summarizing all payments reported on 1042-S forms) to the IRS.

For more detailed information, we recommend you take a look at these resources on the AP & P2P Network site under Compliance section > 1042-S section:

Error-Free Payments to Non-U.S. Persons

Guide to Foreign Payments

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