Key Takeaways
1. If you are an international employer, whether a multinational or a global consulting firm, you need to understand the W-8BEN form.
2. Form W-8BEN is “the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)”. Any individual who provides a service or product for the US market, but does not live there, needs to know the complexities of paying income tax in more than one country.
3. The W-8BEN is the equivalent of the W-9 form used for US persons.
4. US withholding agents, or those who pay income to non-US individuals, are responsible for withholding tax from the income they pay to the individual.
5. Maintaining compliance with US tax laws while managing international employees is critical. If your company does not do so, you can be liable for fines, penalties, and litigation.
Filing the correct documentation with the Internal Revenue Service (IRS) is crucial when doing business in the US, whether with local businesses or internationally. Here we explain the requirements of the W-8BEN, a tax form used by non-US residents for reporting income earned from a US business.
What does the W-8BEN cover?
Most payroll-related tax documentation (such as W2 forms) applies to US-based employment. The W-8 BEN form applies to non-resident aliens (NRAs).
Non-resident Aliens are subject to U.S. tax at a 30% rate on income they receive from US sources that consist of:
- Interest, including specific original issue discount (OID)
- Dividends
- Rents
- Royalties
- Premiums
- Annuities
- Compensation for, or in expectation of, services performed
- Substitute payments in a securities lending transaction
- Other fixed or determinable annual or periodical gains, profits, or income.
When do I need to use a W-8BEN?
If you are a Non-Resident Alien (NRA) living outside of the US, you are taxed at a different rate from US citizens living outside of the US.
All NRAs earning beneficial income in the US must establish their country of residence. Then, the IRS uses that information to determine if the workers are eligible for a lower tax rate. By filling out the W-8 BEN, the worker claims the benefits of any existing tax treaties. The employer can then use the corresponding rate for income tax withholding.
If you are:
- A non-citizen
- Not a resident of the US
- Not in possession of a green card
- The beneficial owner of compensation for work done
Then you must request forms from the HR department of your employer.
Who needs to fill out a W-8BEN form?
If you are working overseas and are a non-resident foreigner who is the beneficial owner of an amount subject to US withholding tax, you must fill out Form W-8BEN.
You should return the form to the requesting body, which is usually your client, after you complete it.
Keep payments separate from local payroll
You should separate international contractor payment from local contractor payment and payroll.
This is crucial as different rules apply to the management of their payments: For example, in the US, Form W-8BEN must be acquired from all contractors to confirm that contractors do not have US income tax obligations. For entities (such as independent contractors that operate through a limited liability company, the form is W-8BEN-E.) Where these forms have not been collected and any income tax liability is unclear, businesses need to withhold 30 percent of payments for potential income tax.
Due to these issues, it is wise to use a company like Horizons to calculate the tax obligations when you hire independent international contractors.
Having a written agreement for your independent contractor is essential, and one of the reasons you want one, in addition to the factors cited above, is that you want to be prepared if you receive questions from the IRS or have to undergo a tax audit.
Tax authorities often ask for written agreements to help establish that a valid independent contracting arrangement is in place (rather than employment) and to ensure that taxes for contractors are being paid correctly. Failing to provide those documents (whether via an audit or a less formal inquiry) can make it more difficult for the business to establish that it has acted within the law.
The Form W-8BEN is effective for international status starting on the date it is signed and ending on the last day of the third calendar year.
Video: How to Complete W-8BEN
For a detailed breakdown of how to fill in the W-8BEN, see the explanation below from US Certified Public Accountant (CPA), James Baker.
Horizon enables hiring independent contractors
As an international business, you may seek to hire independent contractors who offer flexible working arrangements. An independent contractor is a professional who engages with a company to provide services according to the terms of a contract.
However, remember that certain legal and tax obligations apply to the payment.
Among the factors you need to consider:
- Different factors apply when you pay independent contractors based in the US and independent contractors based internationally.
- If using independent contractors, it is crucial to apply different rules than those applied to employees on the payroll. This ensures compliance with tax and business regulations.
- Be sure to have a formal agreement stating what is expected of the client and the contractor.
- Payment mechanisms need to account for the location and wishes of the contractor. Some payment methods are country-specific, while others may add to the cost of doing business, due to currency exchange fees.
To find out more about how Horizons can manage your hiring and payment of global contractors, get in touch today.
Frequently Asked Questions
Just because your US company is operating overseas, that does not mean that it is exempt from paying taxes. As you well know, all US citizens residing in the US and those who spend most of the year in the US are required to pay income tax. A non-citizen living outside of the US is classified as a Non-Resident Alien (NRA) and is taxed at a different rate.
For example, Gunther is a German citizen working for Apple in Singapore. He is an NRA.
Some countries may have treaties with the US that allow their citizens and residents to pay a lower tax rate. All NRAs earning beneficial income in the US must establish their country of residence. Then, the IRS uses that information to determine whether the workers are eligible for a lower tax rate. The worker can claim the benefits of existing tax treaties by filling out the W-8BEN.
The IRS explains that the W-8 forms are a series of five documents that foreign individuals and businesses use to claim exemptions. The W-8 BEN is the form for individuals to establish foreign status for taxation. For example, Gunther, the German who works for Apple in Singapore, will fill out a W-8 BEN.
The IRS also issues a Form W-8 BEN-E which is a different variation used when contracting with a foreign entity rather than a foreign individual.
A completed and signed W-8BEN is required for all reportable tax transactions made to a Nonresident Alien (NRA) of the United States. This includes all payment mechanisms used at the UW. As mentioned earlier, the W-8BEN is the equivalent of the W-9 used for US persons.
There are five W-8 forms: W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY: Determining which one to use comes down to whether you’re an individual or an entity, the type of income you receive, and whether you’re an organization that qualifies for special tax treatment.
All W-8 forms are valid for the year they are signed and for three full calendar years after that.
Contractor Management Outsourcing (CMO) is on the rise in the global expansion industry. This expansion solution allows companies to delegate the tasks of managing a contingent workforce to a trusted partner.
Your international firm doing business overseas with NRAs may find it useful to hire a contractor management services company like Horizons to manage the process related to the W-8 BEN and other tax issues.
