W-8BEN Form: The Complete Guide for US Employers

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Team Qapita
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May 30, 2024

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. 

What is Form W-8BEN?

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.

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Types of Form W-8BEN

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.

Form W-8BEN

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).

Form W-8BEN-E

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.

What is Form W-8BEN Used For?

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. 

Understanding the Role of Form W-8BEN

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).

When Not to Use a W-8BEN Form

Here are some scenarios where a W-8BEN form may not be necessary:

  1. US Persons: Form W-8BEN is not required for the citizens of the US, resident aliens, or domestic entities. Instead, they should use suitable tax forms, such as Form W-8 for entities and Form W-9 for individuals.
  2. Domestic Transactions: Employees or contractors who are engaged only in domestic transactions within their own country and are not receiving any US source income do not need a W-8BEN Form.
  3. Entities Subject to US Taxation: Certain categories of foreign entities may be liable for US taxation and should not use Form W-8BEN. They should rather use other forms, like Form W-8ECI or Form W-8IMY.
  4. Incorrect Situations for Treaty Benefits: There can be situations where some overseas employees or contractors are ineligible for benefits under a tax treaty between their country and the US. In such cases, they should not use a W-8BEN form to claim those benefits on their US source income.
  5. Payments Not Subject to Nonresident Alien (NRA) Withholding: If the income received from US sources is not subject to NRA withholding, a W-8BEN form may not be necessary. For instance, if an individual earns income connected with a US trade or business, they need to use a different form to declare that income.

Who Provides the W-8BEN Form?

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.

Who Needs to Fill Out Form W-8BEN?

Here are the eligibility criteria for employees and contractors who need to complete a W-8BEN Form:

  • They should not be US citizens.
  • They should not be US residents.
  • They should not possess a Green Card.
  • They are the beneficial owners of the income generated.
  • The work has been completed outside the US.
Form W8BEN screenshot

How to File a W-8BEN Form?

Here is a step-by-step guide on submitting a completed Form W-8BEN:

  1. Personal Information: Beneficial Owners need to provide personal details in Part I of the form. This includes their name, country of citizenship, permanent residence address, date of birth and mailing address.
  2. Tax Identification Numbers: Enter the US Taxpayer Identification Number (TIN) if applicable. If not, provide the Foreign Tax Identifying Number (FTIN) in line 6.
  3. Claiming Tax Treaty Benefits: If eligible for tax treaty benefits, complete lines 9 and 10 in Part II. Specify the country with which the treaty exists and the article number that provides these benefits. Also, mention the type of income and the specific withholding rate.
  4. Certification: Once all the information is filled in, sign and date the form at the end of Part III. This certifies that the information provided is accurate and that the worker is the beneficial owner of the income for which the form is being submitted.

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.

What is the Difference Between a W-8 and a W-8BEN?

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:

  1. Form W-8BEN-E is used by foreign entities such as corporations, partnerships, or trusts with US income sources. It establishes their eligibility for exemption from withholding tax on specific income sourced in the US. The form is also known as 'Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)'.
  2. Form W-8ECI is used by foreign entities to claim exemption from US withholding tax on income connected with a US trade or business. 
  3. Form W-8EXP, also known as Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, is used by foreign governments, international organizations, and foreign tax-exempt organizations to claim an exemption or reduced withholding on income from US sources. 
  4. Form W-8IMY is used by foreign intermediaries or flow-through entities to certify their status for tax purposes and claim treaty benefits. 

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What Happens if Employers and Workers Don't Submit a W-8BEN Form?

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.

For Foreign Workers

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.

For Employers

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. 

Best Practices to Avoid Form W-8BEN Issues

  • Set Up Reminders: Make collecting W-8BEN forms part of your onboarding process for new international hires. Utilize calendar reminders or project management tools to ensure timely completion.
  • Clear Communication: Explain the importance of the W-8BEN form to your foreign workers and provide clear instructions on how to fill it out accurately. You can offer assistance if needed.
  • Seek Expert Advice: For complex situations, consider consulting with a tax professional. They can guide you on the appropriate W-8 form to use and ensure compliance with US tax regulations.

Conclusion

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.

Qapita is a Software-as-a-Service (SaaS) platform that offers professional equity and transaction management services. Our equity management platform records capitalization table management, Employee Stock Ownership Plan (ESOP) management, and digital ESOP issuance to help equity stakeholders digitally manage their holdings.

Trusted by over 2,400 companies and 300,000 employee-owners across 40 countries we are rated no. 1 in the Equity Management Software Category by G2.

If you are a startup founder looking to manage your company's equity, reach out to our experts now.

Team Qapita

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