A Brief Overview
Many employers have international workforces, allowing them to get skilled employees from around the globe. Not only does this open up the talent pool, but it can also help you enter new markets and grow your business. W-8BEN Forms are a critical part of hiring foreign employees and contractors. These forms are important to make sure their country of residence is certified and in line with tax regulations.
It’s important for both employers and employees to have their taxes properly filed and within compliance regulations. If you're an employee, consider speaking to your accountant to ensure your taxes are accurate. If you’re a business, make sure to speak with your CPA to make sure you’re classifying employees correctly and remaining compliant.
In this guide, we’ll break down what a W-8BEN Form is, why it’s used, who needs to fill it out, and how you can make payments for international contractors easier. Read on to learn more.
How is it Used?
With a W-8BEN Form, an employee is classified as a non-US citizen on the payroll. This ensures that tax reporting is correct and that the proper amount of income is withheld. As for what W-8BEN Form stands for, it’s the IRS Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting.
If you’re an employer with international employees, it’s important to request this form from these employees and contractors. The W-8BEN Form is important because it helps prevent employees from being double-taxed. Those receiving a US income in a foreign country will be subject to a 30% tax rate.
With a W-8BEN Form, you can confirm that the employee is not a US citizen, confirm they’re the owner of the income, and allow them to claim a reduced tax rate to the status of their country as one with an income tax treaty.
Who Needs to Fill One Out?
There are several criteria that would make it necessary to fill out a W-8BEN Form:
- You are not a US citizen
- You are not a current resident of the US
- You do not have a green card
- You are the beneficiary of the income
- You performed paid or contract work in a foreign country
Those who meet any of these parameters should make sure to fill out a W-8BEN Form. Employers need to consider these parameters when they have their employees fill out a new tax form before being added to the payroll. Neglecting to submit this form could result in penalties and paying more taxes than necessary.
If you’re an employer, you need to make sure to send these forms out to employees that fall under this status. Employees will also need to make sure to send the form back to their employer, not the IRS.
How Often Does it Need to Be Updated?
It can be a hassle to fill out tax forms. Fortunately, a W-8BEN Form is valid for up to three years. The form will go into effect the day it is filled out and signed and then go until the final day of the third calendar year.
If the employee has a change of circumstances, such as moving to a different country, their previous W-8BEN Form will no longer be valid. They will need to let the employer know within 30 days of the life change and make sure to submit a new form to continue getting the proper amount of taxes withheld from their income.
Before the three years is up, it’s important to make sure to submit another form so your status doesn’t expire. Employees will want to make sure they stay up to date with their W-8BEN Form to prevent themselves from being overtaxed.
Types of Income that is Taxable
There are different types of income that are subject to the 30% tax rate. These types of income include:
- Dividends
- Rent
- Premiums
- Annuities
- Royalties
- Interest
- Compensation for services rendered or expectation of services rendered
The tax rate is applied to the gross income from these sources.
Benefits of W8-BEN Forms for Filers
As mentioned, the tax rate for income for nonresident aliens will be 30%, unless they live in a country with the tax treaty. It’s beneficial for employees or contractors to submit this form so they can ensure they get the tax break that comes along with filing their W8-BEN.
The Difference Between W8, W8-BEN, and W8-BEN-E Forms
It can be confusing to see the various W-8 forms out there. In addition to the W-8BEN Form, there are four other forms that are classified under W-8. Let’s take a look at each one and how they differ, so you can make sure the proper forms are filled out.
- W-8BEN-E: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)
- W-8IMY: Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting
- W-8ECI: Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States
- W-8EXP: Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting
From these forms, the W-8BEN-E Form is most common. The W-8BEN-E Form is used for foreign entities rather than individuals. So corporations, partnerships, etc would need to fill out a W-8BEN-E Form instead of the typical W-8BEN. It’s important for employees to know which tax form is right for them and for businesses to understand the differences. If you hire a foreign individual or entity to work for your company, you should always make sure to have the proper forms and paperwork to prevent any issues.
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