XBox, Game and Steam Foreign Developers and US Taxes
If you are an independent game developer and a non-U.S (Non-Resident Alien) inventor, then the task of processing your personal and tax information can be very challenging.
This blog post will help shed some light on the process, and ensure that payment made from the sales of your invention is hassle free.
Foreign or Non-US Independent game developers may be eligible for a reduction, or exemption from U.S. income tax on their royalty income, provided their country has a tax treaty with the U.S.
Tax treaty information appears to be the most difficult and confusing part of the tax process for independent game developers who are not based in the U.S.
- You must determine if your country has a tax treaty with the U.S., and
- Decide if you would like to take advantage of the tax treaty
Determine if your country has a tax treaty with the U.S.
If your country falls into a “tax treaty” zone. See this page Table 1, Page 3, Income Code 10, 11 & 12 – Royalties).
If your country has a ( 0) under the “royalties” category, it means your income will be subjected to 0% withholding.
If you are above 0%, the US will unfortunately withhold at that rate.
Decide if you would like to take advantage of the tax treaty
If your country have a tax treaty with the U.S. then it is in your best interest to apply the treaty to either reduce or exempt the royalty income.
If you are claiming treaty benefits, you are generally required to provide an ITIN
Note: an ITIN is not strictly required to get paid, although without it you will be subject to an automatic 30% U.S. tax withholding, even if your country provides a lower rate of U.S. taxation.
The process of applying for an ITIN alone can take weeks / months and it is easy for the ITIN application to be rejected by the IRS if Form W-7 is not completed in the right order.
Almost all the platforms , such as Xbox , steam , etc. will report your annual U.S. source income or royalties on the IRS Form 1042-S.
This form is issued and sent to the foreign seller or developer on or before March 15 each year, the form will report ONLY your US sourced royalties and amounts withheld during the prior tax year.
As a foreign developer , you are only taxed on royalties earned on sales made to U.S gamers, consumers or customers , therefore if some of your sales were generated from countries other than the USA , only the US sales will be subject to withholding or taxes in general.
***Disclaimer: I am a tax accountant and a CPA licensed in Massachusetts , but I am not your accountant or advocate (Unless you have signed up to my services). This communication is not intended as tax advice, and no tax accountant -client relationship results**