September 15, 2023

The Distrokid Form 1042-S: A Tax Guide for Non-US Musicians

Contents

Independent musicians across the globe use Distrokid to distribute their recordings to popular streaming platforms. In return, Distrokid collects royalties and sends a payout to your bank account. 

If you’re a Distrokid user who’s not a United States resident, Distrokid will send you a tax document called the Form 1042-S and, depending on where you live, you might have had U.S. taxes withheld from your payouts.

In this guide I’ll break down the Distrokid Form 1042-S, explaining why you received it, what to do with it, and how you can potentially lessen your tax exposure.

This guide is for U.S. non-residents. If you’re a resident or citizen of the United States, check out my guide on the Distrokid Form 1099-MISC.

Let’s begin.

What is the Distrokid Form 1042-S?

Form 1042-S is an annual information document that Distrokid files with the United States tax authority, known as Internal Revenue Service (the “IRS”). Your Distrokid 1042-S reports the total royalties Distrokid paid you and the taxes Distrokid withheld from your royalty payments during the previous year. 

In addition to filing Form 1042-S with the IRS, Distrokid provides you with a copy for preparing your personal taxes. Depending on whether your country has an income tax treaty with the United States, you can use the 1042-S to claim a refund of U.S. taxes withheld. If not, you might be able to claim a credit or deduction for foreign taxes paid in your home country.

Distrokid files Form 1042-S for U.S. nonresidents only. You would have received it regardless of whether taxes were withheld from your royalty payouts.

Where to find the Distrokid Form 1042-S

Distrokid will send your 1042-S to the email address in your payments profile. This is the email you provided when setting up your tax information. It may or may not be the same email address that you use to log in to Distrokid.

Why Distrokid withheld taxes from your royalty payouts

If your Distrokid payouts had taxes withheld, there are two possible reasons why:

  1. No Income Tax Treaty - Your country doesn’t have an income tax treaty with the United States or the active treaty doesn’t include royalty income. You might be able to claim a credit for foreign taxes paid on your home country’s tax return.
  2. Incorrect W-8 BEN - You completed a tax form called the W-8BEN when registering for Distrokid payouts. If your country has a tax treaty with the United States and taxes were withheld, you may not have correctly completed the W-8 BEN.

The royalties you earn through Distrokid are U.S. source income. According to U.S. tax law, nonresidents must pay a 30% withholding tax on their U.S. source income, unless an income tax treaty between their home country and the U.S exempts them from the tax or qualifies them for a lower tax rate.

As a withholding agent, Distrokid is liable for the taxes associated with the royalty payments it collects on behalf of its users. If you’re subject to the 30% withholding tax, Distrokid is also liable under U.S. tax law. Distrokid withholds the tax from your payouts and sends it to the IRS to comply with the law.

You can claim an exemption from the 30% tax rate if your country and the United States have an income tax treaty that covers royalty income from U.S. sources. If this is the case, and you’ve provided accurate tax information to Distrokid, then Distrokid won’t withhold taxes from your payouts.

How to read your Distrokid Form 1042-S

You should review your 1042-S to confirm that it’s correct before doing anything else. If it’s not correct, you can ask Distrokid to file a corrected 1042-S with the IRS and provide you with an updated copy. 

Here’s how to read your Form 1042-S.

Box 1 - Income code

This box should show income code 12 (copyright royalties).

Box 2 - Gross income

Gross income is the amount of royalties Distrokid paid you before taxes and fees were deducted from the payout. Reconcile this number with information in the Distrokid Bank screen.

Box 3a - Exemption code

This box will show exemption code 04 if your home country has an income tax treaty with the United States, in which case you might be eligible for a reduced tax withholding rate or no tax withholding.

Box 3b - Tax rate

If your home country has an income tax treaty with the United States and you see code 04 in box 3a, then the applicable tax rate will be in this box.

Box 10 - Total withholding credit

The total withholding credit is the amount of tax that Distrokid withheld and sent to the IRS on your behalf. This might be $0 if you live in a country that has an income tax treaty with the United States, as evidenced by entries in boxes 3a and 3b.

Box 12f - Country code

This box should have a country code corresponding to the country where you live.

What to do with the Distrokid Form 1042?

Your next steps depend on your home country’s tax laws and treaties with the United States. You might be eligible to claim a refund of U.S. taxes withheld. If not, you might be eligible for a credit or deduction for U.S. taxes paid on your home country’s tax return.

Your country of residence, or your home country, is the country where you live and pay taxes. 

File for a refund of U.S. taxes withheld

Does your Form 1042-S show that income taxes were withheld? Refer to Box 10 to confirm.

If so, your first step should be to review the list of United States income tax treaties. Find your home country and review the tax treaty to confirm that royalties are exempt from income tax withholding.

Distrokid recommends referencing the withholding rates table maintained by their payments provider. The applicable tax rate based on your country of residence will be on the table.

Once you’re sure that a treaty exempts your royalties from U.S. tax withholding, you can file a nonresident tax return (Form 1040-NR) to claim a refund of the taxes Distrokid withheld from your payouts.  You should also update your tax information in Distrokid to avoid tax withholdings on future payouts.

This tax form is called the Form 1040-NR. You have up to three years after April 15th of the year following the year on your 1042-S to file Form 1040-NR. For example, if your 1042-S is for 2023, you have until April 15th, 2027 to file Form 1040-NR.

You don’t need to file Form 1040-NR, or any other U.S. form, if your 1042-S shows $0 in Box 10. This means no tax was withheld. 

File taxes in your country of residence

You’ll probably need to report your Distrokid royalty income on your home country’s income tax return. 

Use Box 2 of Form 1042-S to report the income you received from Distrokid. If your royalty income is business income, you might be able to take deductions that decrease your taxable income.

To avoid double taxation, some countries will allow you to take a credit for taxes paid to another country. The foreign tax credit will offset the taxes you‘ll owe to the tax authority of your home country.

You should retain your Form 1042-S to substantiate your tax credit or deduction in the event that your home country’s tax authority audits your tax return.

How to minimize your taxes on Distrokid income

As U.S. sourced income, your Distrokid royalties are taxable income. There’s no getting around that fact. Even so, you can potentially reduce your tax exposure by using the strategies below.

Provide an accurate Form W-8 BEN

The simplest of these strategies is to confirm that your tax information in Distrokid is correct. Distrokid withholds taxes from your payouts based on your responses to their tax interview.

For example, if you indicated that you live in a country that doesn’t have an income tax treaty with the United States, you’d be subject to the 30% withholding tax on royalty remittances. 

You can confirm whether your country has an income tax treaty by reviewing the list on the Internal Revenue Service website or this table maintained by Distrokid’s payments provider.

If you’re subject to a reduced rate of withholding or no withholding, but indicated otherwise, update your responses in the Distrokid tax interview as appropriate.   

Avoid double taxation on royalty income

Depending on where you live, your home country might consider your Distrokid royalties to be taxable income. You might be able to avoid being taxed twice on the income by:

  1. Applying for a refund of U.S. income taxes; and
  2. Taking a credit for foreign taxes paid on your home country’s tax return.

You’d be eligible for a refund of U.S. income taxes only if taxes shouldn’t have been withheld but were. This would be true if you live in a country that has an income tax treaty with the United States that qualifies you for a reduced rate of withholding or no withholding at all.

Assuming you live in a country that doesn’t exempt you from U.S. income tax withholding, you can avoid tax on the income in your home country by claiming a credit for foreign taxes paid. Not all countries provide for this credit so you should confirm before filing your tax return.

Take business deductions to offset royalty income

If you’re operating a music business, your home country might also allow you to take deductions to offset your royalty income. Deductions are similar to a foreign tax credits, but instead of offsetting your tax liability, a deduction offsets your business income, generally yielding a lower tax benefit.

The U.S. taxes you paid might be an allowable deduction. Generally speaking, if you were able to take tax credit for the U.S. taxes, then you wouldn’t also be eligible to deduct the taxes. You can’t receive a double benefit for a single expense item.

Other allowable business deductions might include:

  • Distrokid subscription
  • Music production equipment & supplies
  • Administrative software
  • Marketing costs
  • Tax preparation fees

Allowable deductions depend on local tax law. These categories are provided as examples and aren’t an exhaustive list.

Seek advice from a tax professional when in doubt

If you have questions, consult with a knowledgeable tax professional in your home country or in the United States. If you need help filing a Form 1040 NR to claim a refund of U.S. taxes, completing the Distrokid W-8BEN or have other questions, please get in touch through the contact form below.

This content is for informational purposes only and does not constitute legal, business, or tax advice. You should consult your own attorney, business advisor, or tax advisor regarding matters mentioned in this post. We take no responsibility for actions taken based on the information provided.

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