As a startup founder in the US, you are always on the lookout for the best talent. This might even mean tapping into talent pools across multiple countries. However, hiring global professionals comes with specific tax requirements from the Internal Revenue Service (IRS). One such obligation is filing Form W-8BEN to certify the country of residence for such employees or contractors.
This IRS form is necessary to ensure compliance with US tax laws and avoid withholding taxes on certain income types. By providing accurate information on Form W-8BEN, you can establish the foreign status of your international employees and contractors. It helps determine the appropriate tax treatment for the income they have generated from a US-based company.
Read this blog to understand different features of Form W-8BEN, including its importance, types, usage, compliance requirements and other essential aspects.
The W-8BEN form is officially known as the 'Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)'. It is an important tax form used to ascertain the foreign status of non-resident employees and contractors for tax purposes.
Form W-8BEN can be considered the international counterpart of the W-9 form (Request for Taxpayer Identification Number and Certification). As a US-based employer, you need to request your non-US resident (or citizen) employees or contractors before adding their names to the payroll. They need to provide Form W-8BEN to you instead of mailing it to the IRS directly.
There are two primary types of this form: the W-8BEN and the W-8BEN-E. Each form caters to a specific purpose and is meant for a distinct audience.
Designed for individuals, Form W-8BEN is a simpler form that allows non-US individuals to certify their foreign status, claim benefits under a tax treaty, and avoid double taxation on certain types of US source income. This form collects personal details such as the individual's name, country of citizenship, permanent residence address, and Tax Identification Number (TIN).
On the other hand, Form W-8BEN-E is intended for foreign entities such as corporations, partnerships, or trusts receiving income from US sources. It is known as the 'Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)'. This is a detailed form that serves a similar purpose as the W-8BEN but caters to a broader audience.
Herein, the entities need to provide specific information about their status and claiming tax treaty benefits. It is used to establish their eligibility for exemption from withholding tax on income sourced in the US. This form requires information about the entity, its type, its country of incorporation, its Chapter 4 status, and various other details.
International workers employed by a US company and earning income from the US are typically subject to a tax withholding rate of 30% or the backup withholding rate as per Section 3406 of the IRC. However, the US government has signed income tax treaties with various countries. These treaties are designed to prevent individuals from being taxed by both the US government and the government of their home country.
The primary purpose of the W-8BEN form is to allow foreign employees or contractors to claim tax benefits under such income tax treaties. By correctly filing a W-8BEN form, these individuals can avoid double taxation and may qualify for a lower withholding rate or exemption on their US source income. This includes income like interest, dividends, rents, premiums, royalties, annuities, and compensation for personal services.
Another crucial function of the W-8BEN form is facilitating the IRS in tracking the US income of international workers based out of a foreign country. The form collects essential information, such as the individual's name, country of citizenship, permanent residence address, and tax identification numbers. It also gathers details about the individual's foreign tax identifying number and the type of beneficial owner they are. This information allows the IRS to ensure that treaty benefits are correctly applied and that the individual is complying with the provisions of the Internal Revenue Code (IRC).
Here are some scenarios where a W-8BEN form may not be necessary:
The responsibility of providing the W-8BEN form falls on the employer. You must provide this form to an international employee or contractor during the onboarding phase or when the employment terms are being established. To ensure compliance with US tax laws on payments made to foreign individuals or entities, you should ask for the completed W-8BEN form from every non-US worker.
It is the individual's responsibility to complete the W-8BEN and return it to their employer before receiving their payroll. If the form is not properly completed, the individual may be subject to the maximum withholding rate of 30%, which could lead to over-taxation.
Here are the eligibility criteria for employees and contractors who need to complete a W-8BEN Form:
Here is a step-by-step guide on submitting a completed Form W-8BEN:
While filling out the form, Ensure that all required fields are filled in. An incomplete form may result in its rejection or incorrect withholding. The information provided should be consistent throughout the form. Any inconsistencies can result in confusion and potential issues with the IRS. For detailed guidelines, refer to the IRS website.
As discussed above, the W-8BEN form is meant only for foreign employees and contractors who earn income from US sources. This form affirms their non-US status for taxation purposes. On the other hand, W-8 refers to a collection of IRS tax forms that are completed by foreign individuals or entities to confirm their non-US status and to claim exemptions.
In addition to the W-8BEN form, there are four other W-8 forms designed for different entities and types of income. These include:
Failing to submit a W-8BEN form can have significant consequences for both employers and foreign workers. You need to identify these risks and take the necessary steps to avoid them.
If foreign workers do not submit a W-8BEN form, they may be subject to increased withholding rates on their US source income. The default rate can go up to 30%, which can be a significant portion of the individual's income.
Without a W-8BEN form, foreign individuals may lose out on benefits under a tax treaty between the US and their country of residence. These treaties often provide reduced rates of tax or exemptions for certain types of income.
If you do not collect W-8BEN forms from foreign contractors or beneficial owners, it can lead to fines and penalties from the IRS. As an employer, it is your responsibility to ensure that you have a valid W-8BEN form on file for every overseas worker.
Maintaining tax compliance when hiring global talent is crucial as you expand your remote workforce. Dealing with particular tax responsibilities can be complex, but collaborating with an expert like Qapita can simplify your W-8BEN form procedures, ensuring IRS compliance while facilitating smooth global employment.
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