United States’ organizations looking to pay income to a nonresident individual (or vice versa), are likely to have come across the W-8BEN form.
The Internal Revenue Service (IRS) has many different tax forms that allow businesses and individuals to properly manage tax each year. Failing to collect the correct documents can lead to errors in withholding and declaring tax, as well as cause disastrous consequences down the line.
Keeping on top of tax forms can be time-consuming and tricky, especially as businesses move towards more global and remote hiring. However, don’t let it stop you from hiring top talent for your business, or earning dollars from the U.S. even if you are based abroad.
In this article, we will explain the ins and outs of the W-8BEN and even show you how you can streamline compliance and tax management with ease.
What Is a W-8BEN Form?
The W-8BEN form is a U.S. tax form issued by the IRS, also known as the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals).
It is aimed at non-U.S. citizens who may be eligible for reduced tax rates on certain types of income from U.S. companies, including:
- Money for services provided
- Substitute payments in a securities lending transaction
The form certifies that:
- The employee is not a U.S. resident or citizen
- They own the income referred to in the form
- They qualify for a reduced tax rate if their home country has a tax treaty with the U.S.
As the payer, you will usually need to supply this form to the nonresident person, and they should send it back to you completed. The form should be kept on file and updated every three years.
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Purpose of a W-8BEN Form
The purpose of a W-8BEN is to establish that the individual in question is registered for tax outside the U.S. It also determines any tax that should be withheld by the payer. If eligible, the foreign individual may be able to pay a reduced tax rate instead of the typical 30% charged on income after allowable deductions. This reduction is due to U.S. tax treaties with certain countries.
Individuals file the W-8BEN form with the payer of the income. Having the form on file alerts the payer how much tax they need to withhold when making payments, and whether or not the 30% threshold applies. It also means that the individual does not need to file a U.S. tax return which can save them time and hassle.
Information Required on a W-8BEN Form
The W-8BEN form requests various pieces of information from the foreign individual who is the owner of the income earned in the U.S. It establishes that the person is a tax resident elsewhere and determines whether they are eligible to pay reduced tax. The information is requested to inform the employer, so they know how much tax to withhold.
The W-8BEN form is organized into three parts.
Part I covers basic personal information, including:
- Permanent address
- Mailing address
- City or town of residence
- U.S. taxpayer identification number
- Date of birth
- Reference numbers to associate other forms
Part II covers eligibility for tax treaties:
- Country of tax residence
- Reduced tax withholding rate (this should be completed only if you are claiming treaty benefits not covered in declaring your country of tax residence, for example, foreign students, researchers, those claiming on business profits, etc.)
Part III is the declaration of:
- Providing correct information
- The type of income earned
See the full instructions from the IRS on filling out the form here.
How a W-8BEN Form Is Used
The W-8BEN form, while issued by the IRS, should be submitted by nonresident individuals to:
- Withholding agents
- Foreign financial institutions (FFIs)
The individual must submit the form before they begin earning money from the U.S. entity. Failing to submit the form in time can lead to having to pay the full 30% tax, fines, or legal complications. The payer should then keep this on file and does not need to submit this to the IRS.
To correctly use the W-8BEN form:
- Payers should provide the W-8BEN form to the individual, or the individual should download the form before any income is paid.
- The form should be filled out with all the required details.
- The form should be signed and dated by the owner of the income that is subject to withholding.
- The form should be filed with the payer.
- The payer should withhold the appropriate tax.
- The individual should update and resubmit the form should any changes occur, such as a change of address, country of residence, etc.
U.S. companies hiring contractors in other countries must be especially aware of distributing the correct tax forms to stay compliant. As it can be easy to make errors, many companies automate and streamline HR processes like tax forms by using all-in-one services such as Skuad.
Types of W-8 Forms
Five different W-8 forms are used for slightly different reasons. Understanding them all is essential to ensure you are using the correct forms.
- W-8BEN. The Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting is for nonresident individuals who earn income from a U.S. entity.
- W-8BEN-E. Also known as the new Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting, this form is for nonresident businesses that earn income from a U.S. entity.
- W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. This form is for non-U.S. residents who earn U.S. income from business or trade.
- W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. This form is also used by foreign governments, organizations, central banks, or foundations to claim reductions or exemptions in tax on types of U.S. income.
- W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting. This form should be filed by foreign persons who receive income on behalf of another person or entity.
The W-8 forms are for nonresident aliens only. U.S. residents must fill out the W-9, W-4, or similar forms.
Requirements for Filing W-8 Forms
W-8 forms can be filled out by businesses or foreign individuals who have no U.S. residency but earn income there.
To fill out a W-8 form, the form-filler must:
- Be a nonresident alien or foreign government-related individual, nonresident alien spouse, representative filing on behalf of the individual, nonresident entity
- Provide name and country of origin and other basic information
- Provide a taxpayer Identification Number (TIN). This is usually issued by the IRS or the Social Security Administration (SSA)
- Provide contacts to whoever is providing the income
Persons must be involved in trade or business in the U.S. during the tax year.
The W-8BEN typically remains valid until the end of the year, three years after it is signed. The individual will be charged the 30% tax withholding rate if the form expires.
Easier Tax Compliance With Skuad
If you are looking to work with contractors abroad, you may be confused about which tax forms you need and worried about staying compliant. Growing global teams with workers in multiple countries can quickly get confusing and take away necessary time from other areas of the business. It also means you have the added legal responsibilities of managing the proper tax forms.
Skuad’s global employment and payroll platform removes the stress of compliance when hiring abroad. With local entities, global experts, and automated processes, everything from onboarding to compliant payroll is taken care of for you. You can pay employees and contractors compliantly in just a few clicks.
Don’t avoid hiring the best talent to grow your business just because they are abroad. Handle your HR processes with no hassles. Get started today.
The W-8BEN form may sound confusing and complicated at first, but it doesn’t have to be. You just need to understand for whom and when it’s needed. Remember that the W-8BEN form is for:
- Foreign non-U.S. residents
- People that earn income from the U.S.
- Persons that earn certain types of income
- People that might be eligible for reduced tax rates on U.S. income
If you are still a little unsure, or are simply a business that needs a helping hand keeping track of compliance and tax forms, Skuad’s global employment and payroll platform could be just what you need to streamline tax management. A streamlined contractor management and payroll solution can help you avoid fines and legal trouble. It’s time to dedicate more time to what’s important — growing your business with outstanding global teams.