man working at his computer in office, who needs to complete a W-8BEN form
man working at his computer in office, who needs to complete a W-8BEN form

A guide to Form W-8BEN for U.S. employers with international contractors

Today’s interconnected world has opened the windows of the World Wide Web to allow businesses to collaborate with talent from across the globe. If you’re a U.S. employer engaging foreign contractors, you need to ensure the proper completion of Form W-8BEN: the Certificate of Foreign Status of Beneficial Owners for United States Tax Withholding and Reporting (Individuals) to ensure compliance. 

What is Form W-8BEN?

Form W-8BEN is a declaration by a non-U.S. citizen or resident to establish their foreign status. It determines the tax reporting and withholding obligations for income they receive from a U.S. entity. Essentially, this form helps prevent double taxation and ensures the proper application of tax treaty benefits or exemptions for foreign individuals. A U.S. employer should request a W-8BEN from non-U.S. citizen employees or international contractors.

Tax treaty benefits

Foreign individuals receiving U.S. income are subject to a 30% tax withholding rate. However, many countries have tax treaties with the U.S. These treaties aim to prevent double taxation and offer reduced withholding rates on certain types of income. Form W-8BEN helps foreign contractors claim these benefits, ensuring they’re taxed fairly. You can view a list of tax treaties on the IRS website

Compliance with U.S. tax regulations

Collecting and verifying Form W-8BEN demonstrates compliance with IRS regulations. Failure to do so may result in higher tax withholdings for foreign contractors or potential penalties for the employer.

Avoiding withholding errors

Incorrectly applying tax withholdings can lead to financial losses or legal issues for both parties. Form W-8BEN provides clarity on the tax status of foreign contractors, reducing the risk of withholding errors.

Who needs to fill out Form W-8BEN?

Foreign contractors who meet the following criteria must complete Form W-8BEN:

  • Non-U.S. citizens or residents
  • Those without a green card
  • Individuals who performed work outside the U.S.
  • Beneficial owners of the income received

As a U.S. employer, it’s vital to request this form from your international contractors to fulfill your tax obligations accurately.

What if the W-8BEN is not filled out as required?

If the form is not completed correctly (or at all), the foreign worker could be subject to 30% federal tax withholding on their U.S. income.

Am I required to issue 1099 forms for foreign contractors?

The answer is typically no, especially if your contractor is not conducting business on U.S. soil and lives in a foreign country. 

When not to use Form W-8BEN

While Form W-8BEN is essential for most foreign contractors, situations where a W-8BEN form may not be appropriate or necessary include:

  • U.S. citizens, residents, or domestic entities should use appropriate tax forms like Form W-9
  • Entities subject to U.S. taxation or receiving income not subject to Nonresident Alien (NRA) withholding 
  • Domestic transactions within a contractor’s own country
  • If employees are not eligible for treaty benefits under a tax treaty between their country and the U.S., they should not use a W-8BEN form to claim those benefits

Step-by-step guide to completing Form W-8BEN

  1. Download Form W-8BEN along with instructions from the IRS website and provide a copy of the form to the payee.
  2. Remember that the form should be filled out by the contractor, not the employer.
  3. Contractors must provide their name, country of residence, and taxpayer identification number.
  4. If eligible, contractors should specify their country of residence and any applicable tax treaty benefits.
  5. The form must be signed and dated by the contractor to certify its accuracy.
  6. Contractors return the completed form to their employer securely, ensuring sensitive information is protected.

Is your business going global? 

Remember, proper documentation and adherence to IRS guidelines are key to avoiding tax-related complications and fostering successful collaborations with foreign contractors. As an employer, you are responsible for maintaining records documenting that your contractor is truly not a U.S. citizen or resident (and therefore shouldn’t be issued end-of-year forms like 1099s) or be subject to withholding tax.

If you need help understanding your business’ tax obligations, don’t hesitate to seek professional help. The FSA team would love to hear from you. 

You may also be interested in: Back to Basics: What is tax planning?

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