Q: What is a W-8 and why do you need foreign freelancers and vendors to fill out W-8BEN / W-8BEN-E?
Learn about IRS Form W-8, required when you make payments to foreign freelancers and vendors.
A W-8 is a tax form issued by the Internal Revenue Service (IRS) that reduces taxes for non-US individuals and entities. There are many different types of W-8 forms with different purposes, so it’s important to review which form must be used under different circumstances. Generally, foreign freelancers and vendors who have earned income in the United States must complete W-8 forms to declare and verify their country of residence (US citizens and resident aliens do not qualify and must complete the W-9 form).
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Typically, foreign companies that work in the US are required to pay a 30% tax on their earned income from the following sources:
- Compensation for services expected or performed
- Substitute payments in a securities lending transaction
- Other fixed or determinable annual or periodical gains, profits, or income
Foreign freelancers and vendors need to complete the form since it can exempt them from paying the full 30% tax. Their new tax rate will be determined by a variety of factors, such as the country in which they are located and their type(s) income. The W-8 form is valid from the day it is signed to the end of the third calendar year after unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN signed on January 30, 2020, remains valid through December 31, 2023.
What is the difference between a W-8 and a W-9?
There are many differences between these two forms. The W-9 form is an IRS tax form that is used to confirm a US person or entity’s name, address, and taxpayer identification number (TIN) for employment or other income-generating purposes. The W-8 is similarly an IRS tax form but for non-US entities and persons.
As a company that engages freelancers and service vendors, you should request W9s from US freelancers and vendors and W8s from international freelancers and vendors.
Why do I need my international vendors / freelancers to complete a W-8?
The Form W-8BEN and W-8BENE are forms used to confirm that your international freelancers / vendors are not U.S. taxpayers and that you are not required to withhold taxes from their earnings (your payments to them). For record-keeping purposes, it is important to require that all of your foreign freelancers / vendors submit up-to-date Form W-8s.
How do I choose between W-8BEN and W-8BEN-E?
There are a total of 5 versions of the form, including W-8BEN and W-8BEN-E. Both W-8BEN and W-8BEN-E are officially titled “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting.” Choosing which version to fill out will be determined by whether you are an individual or a business.
Form W-8BEN, which is often referred to as the certificate of foreign status, must be filled out by contractors who act as individuals. Completing the form will verify their foreign status and help individuals receive tax reductions if they reside in a country with whom the US has an income tax treaty and if their type(s) of income meets the criteria.
Form W-8BEN-E must be submitted by foreign companies rather than individuals and provides the same benefits as W-8BEN. Foreign individuals and entities that fail to submit either a W-8BEN or W-8BEN-E successfully will be obliged to pay the full 30% tax.
How can I request a W-8 Form from my international freelancers / vendors?
You can send the W-8BEN and W-8BEN-E (from the IRS website) to your international vendors / freelancers to fill out, sign, and return via mail. This is what most companies without an FMS do. If you use an FMS like Liquid, you should be able to request W-8 forms from your international freelancers / vendors and store the forms securely online (and limit access to the documents and data to certain users).
Ready to start requesting W-8 forms from your foreign / international vendors, freelancers, and independent contractors? Try Liquid today!
Updated: January 3, 2021
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.