If you are a non-resident alien working outside the United States and receiving U.S. sourced income, you may need to file IRS form W-8BEN. The form W-8BEN declares your foreign status and determines if U.S. taxes will apply as an international individual. Understanding and accurately completing the W-8BEN can significantly impact your tax obligations and compliance with U.S. tax laws. Keep reading to learn more about Form W-8BEN for small businesses.
What is W-8BEN?
Form W-8BEN, or its full name, Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), is used to notify the IRS that a business is paying a foreign person. If you’re a foreign or non-resident alien contractor living outside of the United States who gets paid by a business in the United States, you’ll likely want to submit a W-8BEN to the business.
Note that there is another form, W-8BEN-E for foreign entities, such as corporations or partnerships. If you are a foreign entity, you won’t use W-8BEN, since this form is only used for individuals.
Foreign individuals are not subject to regular U.S. income taxes like U.S. citizens, however the IRS still maintains records of business activity and revenue generated from U.S. sources. Simply put, the W-8BEN tells the business and Internal Revenue Service (IRS) that a payee is foreign and not subject to regular U.S. income tax.
How is W-8BEN used?
When a U.S. citizen or resident starts working, they submit Forms W-9, I-9 and/or W-4 to relay information on tax withholdings. In contrast, international individuals, especially contractors, provide a signed W-8BEN to the payer. The form, which is not filed directly with the IRS, includes essential details like contact information, taxpayer ID, and tax treaty benefits.
As a U.S. citizen, Form W-4 tells your employer how to handle tax withholdings and Form I-9 verifies your status as a legal worker within the United States. If you’ve worked as a contractor, you use the W-9 to tell the business how your payments should be reported for tax purposes.
If you’re an international contractor or hire an international contractor to perform services for a business, you’ll use W-8BEN for similar purposes. The W-8BEN is a certification that the payee is a foreign person for tax purposes.
By default, foreign income earned in the United States is subject to a 30% tax rate, which the paying entity must withhold. This is for certain types of U.S. sourced income that are not connected with a trade or business in the United States.
However, some countries have an income tax treaty with the U.S., granting an exemption of the 30% tax to its citizens.
Who completes a W-8BEN?
Form W-8BEN is completed by the foreign contractor and submitted to the paying business, referred to as “the payer” or the “withholding agent”. According to IRS guidelines, you must submit Form W-8BEN “if you are a nonresident alien who is the beneficial owner of an amount subject to withholding.”
Non-citizens living outside the United States may also use Form W-8BEN to report U.S. sourced interest, dividends, rents, royalties, premiums, annuities, and other eligible income. But for small businesses, it’s primarily used for payments to foreign contractors.
If you’re an employee of a U.S. business, a U.S. citizen, or a legal resident, you are not subject to submitting Form W-8BEN.
How to file W-8BEN
If you’re a contractor with a country of residence outside of the U.S., you’ll submit Form W-8BEN to the company or person paying you. It’s not filed directly with the IRS or any other government agency. If you work with multiple U.S. companies, you should give each payer a copy of Form W-8BEN.
The form includes basic information about the filer, such as:
- First and last name
- Permanent residence address
- Mailing address
- U.S. taxpayer identification number (if applicable)
- The U.S. tax identification number works like a Social Security number (SSN) for non-U.S. citizens
- If a foreign resident must file a U.S. tax return, the taxpayer ID is used to report U.S. source income to the U.S. government.
- Date of birth
- Foreign tax identifying number,
- Claim of tax treaty benefits details.
- Tax treaty benefits may allow withholdings or tax payments at a reduced rate
The business should verify the W-8BEN is filled out completely and keep it on file for future reference. In the even the IRS requests a copy of the completed form, the withholding agent must be able to furnish one.
You can find a fillable copy of Form W-8BEN on the IRS website here along with a copy of detailed instructions.
What to do with W-8BEN when paying foreign contractors?
If you’re a small business and a contractor gives you a Form W-8BEN, here’s what you should do:
Verify the form: Ensure the form is filled out correctly and completely. This includes the contractor’s personal information, non-U.S. status declaration, and any applicable tax treaty benefits they’re claiming. The form explains if they’re taking advantage of any specific exemption. A taxpayer identification number may not be required for some foreign individuals.
Store the form safely: Keep the W-8BEN in your records. It’s not submitted to the IRS but must be available if requested to prove that you were correct in not withholding taxes from payments to the contractor.
Report payments appropriately: When reporting payments to the IRS, use the information on the W-8BEN to apply the correct tax treatment. If the contractor qualifies for a reduced withholding rate under a tax treaty, apply this rate when reporting. You’ll likely use Form 1042-S, not the typical 1099-MISC or 1099-NEC used for U.S. contractors.
Remember, the W-8BEN is proof the submitter is exempt from the requirement to withhold income tax on payments to that contractor. If you’re ever uncertain, it’s wise to consult with a tax advisor with experience in international tax matters.
Other kinds of W-8 forms
W-8BEN is part of a larger family of W-8 tax forms for foreigners, all used for international payments and taxes. Other types of W-8 forms you may want to be aware of include:
- Form W-8BEN-E: Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities). Similar to the W-8BEN but for foreign entities, such as corporations or partnerships.
- Form W-8ECI: Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. Used by foreign individuals or entities to claim that income is linked to a U.S. business and, therefore, subject to U.S. tax filing.
- Form W-8EXP: Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting. Used by foreign governments, international organizations, foreign central banks of issue, foreign tax-exempt organizations, foreign private foundations, or governments of U.S. possessions.
- Form W-8IMY: Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting. Used by intermediaries (like brokers or agents), flow-through entities, or U.S. branches of foreign banks or insurance companies to certify their status for withholding purposes.
Most businesses won’t encounter additional Form W-8s, however, it’s helpful to be aware that various IRS requirements exist if you work with international contractors or businesses.
A final word on W-8BEN
The W-8BEN form is vital for small business owners operating outside of the United States but engaging with U.S. clients. Understanding and correctly filling out this form can significantly impact your tax obligations and ensure compliance with U.S. tax laws.
Whether you are a foreign contractor receiving payments from U.S. businesses or a U.S. business paying foreign contractors, familiarizing yourself with the W-8BEN and its proper handling is crucial for smooth international transactions.
By taking these steps, you can confidently navigate the complexities of international tax requirements, allowing you to focus on growing and managing your business effectively.
Eric Rosenberg is a finance, travel, and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full-time. You can connect with him at Personal Profitability or EricRosenberg.com.