Paying Directors Who Live in Japan: U.S. Withholding, Forms 1042 and 1042-S, and the U.S.–Japan Tax Treaty

An executive or founder of a Japanese parent company may also sit on the board of a U.S. subsidiary while continuing to live in Japan, and the U.S. company pays them for that board service. The U.S. side then has to answer two questions: do we withhold U.S. tax from a Japan-resident director’s fees, and do we issue a 1099 or a 1042-S?

This article walks through the U.S. source rules for personal services (work done in the U.S. vs. in Japan), the directors’ fees article of the U.S.–Japan income tax treaty (Article 15), Form W-8BEN, Forms 1042 and 1042-S, and how Japan taxes the director.

Forms 1042 and 1042-S are due March 15 of the year after payment. If you pay directors’ fees at year-end, record where the director actually performed the services before you pay.

Key points

• Under U.S. law, compensation is sourced where the services are performed. Fees for board work a director does in Japan are not U.S.-source income, so a nonresident alien director owes no U.S. tax and there is no U.S. withholding on that portion.
• Fees for services performed in the United States, such as attending a board meeting in person, are U.S.-source income. Because a director is not an employee, that portion is generally subject to 30% withholding and reporting on Forms 1042-S and 1042.
• Article 15 of the U.S.–Japan treaty lets the company’s country of residence (the U.S.) tax directors’ fees and contains no exemption. But a treaty cannot expand tax beyond domestic law, so the U.S. taxes only the U.S.-source portion.
• Japanese residents (other than non-permanent residents) are taxed on worldwide income, so the director reports the fees in Japan and may be able to claim a foreign tax credit for U.S. tax paid.
• If the person also works for the U.S. company as an officer and employee, that pay is wages subject to the W-2 withholding rules. Separate the two roles in the contract and in practice.

First question: director’s fees or employee wages?

The Japanese term yakuin hōshū covers pay to directors and executive officers alike. U.S. tax law separates fees earned as a director from wages earned as an officer-employee. IRS Publication 515 says that in most cases an officer of a corporation is an employee, but a director acting in that capacity is not.

Role	U.S. tax treatment	Pay for services performed in the U.S.	Reporting
Director (board service)	Not an employee	Generally 30% withholding	Forms 1042-S and 1042
Officer and employee	Usually an employee	Wage withholding (Form W-4 completed per Notice 1392); FICA in most cases	Form W-2 and related forms
Services performed in Japan (either role)	Services of a nonresident alien outside the U.S.	No U.S. withholding	—

Wages paid to a nonresident alien employee that are effectively connected with a U.S. trade or business are subject to graduated withholding like those of citizens and residents, and the employee completes Form W-4 using the special instructions in Notice 1392. Compensation paid to a nonresident alien for services performed outside the United States is not wages and is not subject to withholding (Pub. 515). The rest of this article focuses on directors’ fees.

Want an IRS Enrolled Agent to handle your business return? Quotes are free. Request a quote →

Source rules: work done in Japan is not U.S.-source income

Publication 519 says all wages and other compensation for services performed in the United States are U.S.-source income, and that nonresident aliens are taxed only on U.S.-source income and certain income connected with a U.S. trade or business.

• Services performed in Japan: reviewing board materials in Japan or joining a board meeting by video from Japan is not U.S.-source. A nonresident alien director owes no U.S. income tax on it, and no withholding is required.
• Services performed in the U.S.: fees for days spent attending board meetings in the United States are U.S.-source. Pub. 519 says performing personal services in the United States at any time during the tax year usually means you are engaged in a U.S. trade or business.
• Services in both countries: employees source compensation on a time basis. Self-employed people (non-employees) use the basis that most correctly reflects the facts, which in many cases is also a time basis (Pub. 519).

The time-basis fraction is days of services performed in the United States divided by total days of services, applied to the total compensation (Pub. 519). Keep travel itineraries and board attendance records to support the split.

Nonresident aliens are not subject to self-employment tax unless a social security agreement covers them under the U.S. system (Pub. 519). And because a director is not an employee, directors’ fees are not wages subject to FICA withholding.

Treaty Article 15 (Directors’ Fees): no exemption

Article 15 of the current U.S.–Japan income tax treaty, signed November 6, 2003, reads (treaty text):

“Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other Contracting State.”

The Treasury Technical Explanation adds that:

• Article 15 is an exception to the general rules of Articles 7 (Business Profits) and 14 (Income from Employment).
• The company’s country of residence may tax directors’ fees regardless of where the services are performed. This follows the OECD Model; the U.S. Model limits taxation to services performed in that country.
• Whether the fee is attributable to a permanent establishment is not relevant.

So there is no “183 days or less” style exemption for directors’ fees like the one for employment income under Article 14. At the same time, the Technical Explanation says, regarding Article 1(2), that the treaty may not increase the tax burden beyond what domestic law imposes, and that a right to tax given by the treaty cannot be exercised unless it also exists under internal law. Because U.S. domestic law does not tax a nonresident alien on fees for services performed in Japan, the U.S. in practice taxes only the U.S.-services portion.

Officer-employees: Article 14

If an officer is paid wages as an employee, Article 14 applies. Pay for work done in the United States is taxable only in Japan if all three conditions are met: (a) the person is present in the U.S. for no more than 183 days in any 12-month period starting or ending in the tax year, (b) the pay is made by or on behalf of an employer that is not a U.S. resident, and (c) it is not borne by a U.S. permanent establishment of the employer. When a U.S. company pays the wages, condition (b) fails, so even short business trips can produce U.S.-taxable wages.

What the U.S. company needs to do

1. Define the payment: document in the agreement and board minutes whether the person is paid as a director or as an employee.
2. Track location and days: keep records of U.S. trips and of where and how the director attended each meeting.
3. Collect Form W-8BEN: a nonresident alien who is the beneficial owner of an amount subject to withholding gives Form W-8BEN to the withholding agent when requested (W-8BEN instructions). A nonresident claiming a treaty exemption from withholding on personal services income uses Form 8233 instead, but the treaty provides no exemption for directors’ fees.
4. Withhold 30% on the U.S.-services portion: you generally must withhold 30% on compensation paid to a nonresident alien for personal services performed in the United States, unless the pay is specifically exempt or subject to graduated withholding (Pub. 515).
5. Deposit the tax: deposit withheld tax by electronic funds transfer, through EFTPS or IRS Direct Pay. The amount withheld determines how often you deposit (Pub. 515).
6. File Forms 1042-S and 1042: furnish Form 1042-S to the director and file it with the IRS, and file Form 1042, by March 15 of the following year (Form 1042-S instructions). Check whether income code 17, used for independent personal services of a non-employee, is the right code.

The director is treated as engaged in a U.S. trade or business and files Form 1040-NR to settle the 30% withheld. A nonresident who is not an employee receiving wages subject to withholding must file by June 15 of the following year (June 15, 2026 for 2025; Pub. 519). Check state rules separately.

How Japan taxes the director

• Worldwide income: Japanese residents other than non-permanent residents are taxed on all income, wherever it arises (National Tax Agency No. 2010). Both the Japan-services and U.S.-services portions go on the Japanese return.
• Income category: Japan’s employment income (kyūyo shotoku) includes salaries and bonuses paid to employees and officers (NTA No. 1400).
• Filing: a person who receives salary from a payer with no Japanese withholding obligation must file a final return (NTA No. 1900). Check this if the U.S. company pays without Japanese withholding.
• Foreign tax credit: U.S. income tax paid may be credited against Japanese income tax within the credit limit (NTA No. 1240; treaty Article 23, Relief from Double Taxation). The NTA notes that a tax the payer can choose to have refunded after paying is not a creditable foreign tax, so if the 30% withholding is too high, settle it on Form 1040-NR first.

Worked example: $60,000 a year to a Japan-resident director

Example: U.S. company X pays C, a director who lives in Japan (a U.S. nonresident alien and not an employee of X), $60,000 a year in directors’ fees. C spends 60 days on board work during the year: 6 days attending board meetings in the United States and 54 days working from Japan. All figures are hypothetical, and the fees are split on a time basis.

Item	Calculation	Amount
U.S.-source fees	$60,000 × 6 ÷ 60 days	$6,000
Fees for services in Japan (not U.S.-source)	$60,000 − $6,000	$54,000
Withholding by X (30% of U.S.-source)	$6,000 × 30%	$1,800
Amount C reports in Japan	Full amount (converted to yen)	$60,000

• X withholds $1,800, deposits it electronically, and by March 15 of the following year furnishes Form 1042-S to C, files it with the IRS, and files Form 1042.
• C reports the $6,000 of U.S.-source fees on Form 1040-NR and settles the $1,800 withheld.
• C reports the full $60,000 in Japan and considers a foreign tax credit for the U.S. tax finally paid.

FAQ

If the director joins a U.S. board meeting by video from Japan, is that taxed in the U.S.?

U.S. source rules look at where the services are performed (Pub. 519). Time spent participating from Japan is not services performed in the United States, so it is not U.S.-source income for a nonresident alien. Keep a record of where the director attended from.

Can the treaty eliminate the 30% withholding?

Article 15 has no exemption for directors’ fees, so the U.S.-services portion can be taxed in the U.S. Form 8233 is used to claim a treaty exemption from withholding, so there is nothing for it to claim here.

Are directors’ fees subject to FICA or self-employment tax?

A director is not an employee, so the fees are not wages subject to FICA, and nonresident aliens are not subject to self-employment tax unless a social security agreement covers them under the U.S. system (Pub. 515 and Pub. 519).

When is the director’s U.S. return due?

If the director is not an employee receiving wages subject to withholding, Form 1040-NR is due June 15 of the following year (Pub. 519).

At CLT NY INC., an IRS Enrolled Agent handles withholding on payments to directors and officers living in Japan, prepares Forms 1042 and 1042-S, and files the director’s Form 1040-NR, in Japanese or English. See our corporate tax services or contact us.

Need help with a business return? CLT NY INC. prepares corporate and LLC returns (Form 1120, 1120-S, 1065 and state returns) for small businesses, in English or Japanese. Fees and the process are on our U.S. corporate tax return service page, and the quote, payment, documents and progress are all handled in our own app.

Related articles

• Hiring a Freelancer in Japan: Why a U.S. Company Should Collect a W-8BEN, and When Withholding Applies
• Paying a Japanese Parent Company: Withholding on Royalties, Service Fees, and Interest, Forms 1042/1042-S, and W-8BEN-E
• How to Fill Out and Submit Form W-8BEN: Avoiding 30% Withholding Tax on U.S. Stock Investments
• Exempt FICA Tax with the Japan-US Social Security Agreement: A Guide to Obtaining a Certificate of Coverage for Expatriates
• E-2/L-1 Visa Holders: Understanding Salary Structures and Combined Taxation Rules for US and Japan-Paid Income
• US Corporate Annual Compliance Calendar: Deadlines for Annual Reports, Franchise Tax, Form 1120, 1099s, and W-2s

Sources: U.S.–Japan Income Tax Convention (2003); Technical Explanation (2003); IRS: Japan Tax Treaty Documents; IRS Publication 515; IRS Publication 519; Instructions for Form W-8BEN; Instructions for Form 1042-S; National Tax Agency No. 2010; NTA No. 1400; NTA No. 1900; NTA No. 1240. Information as of October 2026. This article provides general information and is not individual tax advice.