Personal Tax Question: How to pay tax on a New York based contract?

The subject of this Personal Tax Question & Answer, concerns a non-US individual’s question on performing non-resident freelance services in the United States.

Freelancer’s Question: I will be starting freelance work for a company in New York and they told me I need a US IRS Individual Tax Identification Number (ITIN), otherwise they will need to collect a percentage of my payment for taxes. Is this true, even for a UK freelancer doing web design work?

Expert’s Answer: I am afraid that your information is not quite correct. An ITIN is required by the Federal Tax authorities (IRS) for anyone required to make a Federal Tax return but who does not have a US Social Security Number.

If you are not required to make a Federal Tax return, then theoretically, you do not need an ITIN. However, the American company who is paying you will be at risk in the event that you are required to make a Federal tax return, but fail to do so.

The requirement to file a Federal Tax return is more complex than you may think and do not assume that regulations concerning your personal tax position applies equally to your company (assuming that you contract through a personal service company).

Please bear in mind that the IRS are quite obsessed with payments to non-residents and it would appear that your US client is trying to play it safe.

Also bear in mind that depending on your circumstances, it may be necessary for you to pay tax in the US and then recover this tax in the event that the double taxation agreement between the UK and the USA deems you to be taxable in the UK for your USA-sourced income. In which case, you will definitely need an ITIN. My recommendation is that you apply for an ITIN as you will lose nothing by it, even if you end up not needing it.

References:
The expert was Barry Roback FCA, director at Privilege Accounts, a tax and accountancy firm serving freelancers, contractors and the self-employed.

Editor’s Note: Further Reading – Freelancers’ Questions: Is freelancing for a US client VAT-free?

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