If you’re looking to bring on team members from outside the US but don’t want to go through all of the paperwork and bureaucracy associated with hiring foreign employees, you might consider hiring contractors instead.
But while choosing to pay someone as a contractor rather than an employee does eliminate a lot of paperwork, it does not eliminate the need for forms altogether.
When working with overseas contractors, one form with which you’re going to need to become super familiar is the W-8.
In this article, we’ll explain what the W-8 is, what it's for, when to use one, and the common mistakes businesses make when using W-8 forms.
What are W-8 forms?
A W-8 form is an official tax document required by the US Internal Revenue Service (IRS) for foreign individuals and businesses who receive income from US sources.
If you’re a non-US person receiving income from a US business, you’ll need to fill in a W-8. Conversely, if you’re a US-based company hiring foreign contractors, you’ll need to have them fill in a W-8.
The W-8 is used to certify the non-US status of the individual or entity receiving funds and helps to determine the correct tax treatment. For example, in some scenarios, it may be necessary for the US payer to apply withholding tax on income paid to non-US residents or entities.
There are several variations of the W-8 form, which will be explored in more detail later.
How W-8 forms help US businesses with withholding taxes
When a US business makes a payment to a foreign individual or entity, such as service fees, royalties, or dividends, they are generally required to withhold US tax on this payment at a standard rate of 30%.
However, not every foreign individual or entity will need to pay tax in the US. In fact, many countries have tax treaties that create exemptions from withholding tax.
If the foreign payee from such a country submits a valid W-8 form, they can reduce or even eliminate the withholding tax by claiming a reduced tax rate under an applicable tax treaty.
By collecting a W-8 form, the business can:
- Identify the recipient's foreign status to ensure they are not dealing with a US taxpayer.
- Determine the correct withholding tax rate or exemption.
- Comply with IRS regulations and avoid liability for incorrect tax withholding or reporting.
Consequences of not collecting or incorrectly processing W-8 forms
There are a number of important consequences for businesses that either fail to collect W-8 forms or process them incorrectly.
These include:
- Withholding liability. If the business doesn’t have a valid W-8 for the foreign person or entity, they may be required to withhold the full 30% tax, even if a lower rate could have been applied. If they fail to do so, the IRS may hold the business liable for unpaid taxes.
- IRS penalties. The IRS can apply penalties and interest charges for not properly collecting W-8 forms or misapplying tax withholding rules.
- Increased compliance burden. In the event of an IRS audit (not desirable even if you’ve got all of your paperwork in order) US businesses that can’t provide valid W-8 forms may face additional scrutiny which can lead to fines or penalties.
Who files W-8 forms?
W-8 forms are filed by non-US persons and entities to certify their foreign tax status and claim any applicable tax treaty benefits on US-sourced income.
They submit these forms to US payers or financial institutions, rather than to the IRS directly.
When should a W-8 form be used?
A W-8 form should be used whenever a non-US individual or entity earns income from a US source and needs to certify their foreign status, claim treaty benefits, or declare income effectively connected with a US business.
Here’s a quick checklist to determine if you need to use a W-8 form:
- Non-US status. If the individual or business receiving payment from a US business is a foreign tax resident, they should use the W-8. If they are a citizen or resident in the US and subject to US taxation, they need to use a W-9.
- Claiming tax treaty benefits. If the contractor’s country has a tax treaty with the US, they can use the W-8 to claim applicable tax benefits.
- Effectively connected income. If the contractor is receiving funds from a US business, then the W-8 should be used.
As a contractor, you’ll need to complete and submit a W-8 form whenever you start receiving payments from a new client. Any non-US individuals or businesses earning passive income, like dividends, interest, and royalties from US sources also need to submit a W-8 form if they wish to avoid full withholding rates.
The W-8 often gets confused with its sister form, the W-9 form.
The key distinction between the two is that one is used for non-US individuals and businesses (the W-8) and the other is for US contractors (the W-9).
Beyond that, they cover much of the same ground, certify taxpayer identification numbers, and properly define withholding tax requirements.
What information is required on a W-8?
The W-8 is a simple and self-explanatory single-page form. Here’s what you’ll need to have on hand to fill one in:
- Name. The individual or entity’s full legal name
- Country. The country of citizenship (for an individual) or the country where the business is incorporated or organized (for entities).
- Permanent address. Your non-US address.
- Mailing address. The address you want to receive mail to (if different from your permanent address).
- Tax identification number. A foreign tax identification number (TIN) if required. This is especially important for claiming treaty benefits.
- Claim of tax treaty benefits (where applicable). The country with which the US has a tax treaty and the specific provisions under which the individual or entity is claiming a reduced tax rate.
- Certification. A signature, date, and declaration that the information provided is correct and that the individual or entity in question meets the conditions for any tax treaty benefits being claimed.
Types of W-8 forms
When we talk about the W-8 tax form, what we’re actually talking about is a set of forms that fall under the same banner.
Here, we explain the subtle differences between different W-8 tax forms.
W-8BEN
The W-8BEN is the classic W-8 form, used by foreign individuals to certify their non-US tax status and claim any relevant tax treaty benefits.
Its official title is Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding and Reporting - Individuals)
W-8BEN-E
The W-8BEN-E is the version of the W-8 that foreign entities use to certify their non-US tax status and claim any relevant tax treaty benefits.
Its official title is Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding and Reporting - Entities.
W-8ECI
The W-8ECI form is used by foreign persons or entities who are receiving income that is effectively connected with a US trade or business, such as a foreign company that has US operations.
The official title is Certificate of Foreign Person’s Claim That Income Is Effectively Connected with the Conduct of a Trade or Business in the United States.
W-8EXP
The W-8EXP is the version of the W-8 form that must be used by foreign governments, tax-exempt organizations, and international organizations that wish to claim exemption from US withholding tax on certain U.S.-sourced income.
The official title is Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting.
W-8IMY
The W-8IMY is used by foreign intermediaries (such as agents or brokers) or flow-through entities that act on behalf of others to transmit income that is subject to US tax withholding. It helps these entities certify the foreign status of the beneficial owners and other intermediaries.
The official title is Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting.
How to file a W-8 form
Filing a W-8 form is super simple. Just follow these four steps
- Download the correct W-8 form for your needs from the IRS website.
- Complete all fields of the form with the correct and relevant details.
- Sign and date the form to certify that the information provided is accurate
- Submit the form to the US payer or financial institution requesting it (not to the IRS).
Streamline your tax obligations
The W-8 form is an important document used to collect taxpayer information from overseas contractors and freelancers and to correctly classify their withholding tax status.
It's one of many tools you’ll need when hiring remote contractors. You’ll also want a solution for managing contractor spending, like BILL, our financial operations platform.
Our diverse platform is also stacked with powerful features for managing business spending with contractors, such as:
- Spend analysis tools
- Contractor payment management
- Budget management
- Cash flow forecasting
FAQ
What is a W-8BEN?
The W-8Ben is a tax form that foreign individuals use to certify their foreign status and to claim any application of treaty benefits. It helps US payers apply the correct tax treatment and overseas contractors and other self-employed people avoid having to pay unnecessary withholding tax.
W-8BEN vs Form W-8BEN-E
The big difference between the W-8BEN and the W-8BEN-E is who the forms are used by.
The W-8BEN is used by foreign individuals, while the W-8BEN-E is used by foreign entities.
Both forms are used to certify foreign tax status and claim applicable treaty benefits. The -E version is more detailed as it must also capture the entity’s type and structure for US tax purposes.
Why is a W-8BEN-E required for business?
A W-8BEN-E form is required for foreign businesses that are earning income from a US source. The form allows them to certify their foreign entity status and claim tax treaty benefits.
As a US business paying to a foreign organization, a W-8BEN-E is important to collect in order to maintain compliance with your own IRS obligations.
