W-8BEN Form: What It Is And What It Is Used For

In this age of globalization, an increasing number of US-based businesses are hiring international workers. Many companies rely heavily on independent contractors who may be found all over the world, so you don’t even have to stay in the United States when expanding globally.

However, this larger pool of prospective employees comes with challenges. This means you must be tax compliant — and a key part of that is ensuring your crew abroad is taxed correctly.

Non-citizens living outside the United States are taxed differently from citizens and permanent residents of the United States. As a result, if your company hires someone who isn’t a citizen or a green card holder, you must notify the IRS.

If you have employees or contractors working in another country, you must understand how the W-8 BEN form works. In this article, we’ll go over the fundamentals of the W-8 BEN form, when you’ll need one, and why it’s vital.

What is a W-8 BEN Form?

A W-8 BEN form is a tax form used by the United States Internal Revenue Service (IRS) to determine the foreign status of non-resident aliens for tax-related reasons. It confirms which country an individual is sending their taxes to,  as it is not the United States.

You can access the W-8 BEN form here.

Foreigners are typically subject to a 30% tax rate on certain forms of income and capital gains received from US payers, including:

• Interest
• Dividends
• Rents
• Royalties
• Premiums
• Annuities
• Compensation for services rendered

Individuals must submit the document to the payer or withholding agency before receiving income or credits from them. Failure to complete a Form W-8BEN may result in paying either the full 30% rate or the backup withholding rate under Section 3406.

The form also assists you in claiming a reduction or exemption from US tax withholding if you live in a nation with which the US has an income tax treaty and the income you earned is subject to that treaty.

What is a W-8 BEN form used for?

The IRS taxes all income earned by businesses in the United States. People who live in the United States, have a US Green Card, or spend the majority of the year in the United States are subject to income tax. A non-citizen living outside the United States, on the other hand, is designated as a Non-Resident Alien (NRA) and is taxed at a separate rate.

All NRAs who earn a good living in the United States must establish their country of residence. The IRS utilizes this information to determine whether the employees are qualified for a lower tax rate. The worker claims the advantages of any existing tax treaties by completing the W-8 BEN. The matching rate for income tax withholding can subsequently be used by the employer.

When Should Foreign Employees fill Out the W-8 BEN Form?

Employers must obtain Form W-8 BEN from foreign contractors who meet the conditions before paying them for services delivered. Contractors who fail to complete the W-8 BEN form face a 30% taxes rate.

HR should seek the following paperwork from employees and contractors who match these criteria:

• Is a non-citizen
• Is not a resident of the US
• Does not have a green card
• Is the beneficial owner of compensation for work done

How to fill out a W-8 BEN form

Once you request that a worker complete a W-8 BEN form, here’s what they’ll need to do:

1. Enter the information requested by the form, including:

• The employee’s full name
• The employee’s country of citizenship
• The employee’s permanent residential address
• The employee’s mailing address (if different from their residence)
• The employee’s Individual Taxpayer Identification Number (ITIN) or Social Security Number (SSN) (for employees or workers seeking a taxation reduction based on a tax treaty)
• The Foreign Tax Identifying Number (TIN) issued by the employee’s jurisdiction of residence if the country doesn’t issue TINs, there’s a checkbox for the employee to opt-out
• The reference number If the withholding agent needs referencing account information to meet regulations
• The employee’s date of birth (MM/DD/YYYY)
• The foreign country for whose tax laws the employee claims benefit
• Withholding rates (if applicable)

2. Sign and date the form
3. Return the form to the requesting entity

A non-green card holder living outside the US will not have an SSN, but they can apply for an individual taxpayer identification number (ITIN), issued regardless of their immigration status,  to meet with US filing or reporting requirements.

Who is responsible for providing the W-8 BEN form?

It is the responsibility of the employer to request and supply the W-8 BEN form to employees and contractors.

When does a W-8 BEN form expire?

A W-8 BEN form is valid until the end of the third consecutive calendar year after it is signed. A W-8 BEN form signed on 1/30/24, for example, is valid until 12/31/27.

If the foreign employee’s identifying information changes, a new form must be filled out and filed. To ensure compliance, employers need to know the form’s validity and keep it up to date.

What Happens if neither Employer nor Employee submit a W-8 BEN form?

Workers and employers have different responsibilities.

For Workers

If employees do not complete Form W-8 BEN, they are subject to a 30% tax rate, even if they qualify for a reduced rate. They may not receive all of the money to which they are entitled if they do not have the paperwork. This might be an expensive omission for both employers and contractors.

For Employers and HR Professionals

In the absence of an updated W-8 BEN form, you must deduct the regular 30% income tax from the employee’s wages. This could indicate that you are underpaying your employees. The repercussions of wrongfully withheld compensation can be severe, including a breach of the employment contract or other legal issues.

Which Countries Have Tax Treaties With the United States?

Many foreign nations have tax treaties with the United States. Residents of qualified foreign nations (who are not necessarily citizens of those countries) may be eligible for lower tax rates on U.S. sources of income under these agreements. Check here to see if your country has a treaty with the US.

What is the Difference Between Form W-8BEN and Form W-8BEN-E?

Foreign entities use Form W-8BEN-E (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting – Entities) rather than Form W-8BEN, which is meant for only foreign individuals. Foreign entities or businesses pay the same tax rate (30%) as foreign persons, and like individuals, they may qualify for a lower tax rate if their home country has a tax treaty with the United States.

Conclusion

Form W-8BEN is an important form used to establish if a person is subject to US tax withholding. It’s also used to take advantage of tax treaty benefits like reduced or exempt withholding. Therefore, individuals who receive payments from the United States fill out the form. While the form may appear complicated, it is critical that it is filled out correctly. As a result, you should consider contacting Foundeck to assist you in order to avoid any potential penalties or tax issues. We can assist with the collection of W-8BEN forms thereby, minimizing the amount of human work required to maintain tax compliance. We can also provide notifications when the W-8BEN form is due to expire (usually every three years).