Everything you need to know about the W-8 BEN form

Does the W-8 BEN form sound familiar? If your business involves hiring international freelancers or employees, you have most likely encountered the term “W8 BEN form.” This form is essential for non-U.S. residents to claim a reduced or exempt withholding tax on income earned from working with a US company. In this blog, we will delve deep into the details of the W8 BEN form, covering its purpose, requirements, and how to file it correctly. We will also discuss how Global Squirrels assists you in handling compliance relating to hiring and managing international freelancers without hassle.

What is a W-8 BEN tax form?

A W8 BEN form is an IRS-mandated form to certify the foreign status of a non-resident (also referred to as Non-Resident Aliens or NRAs) for taxation purposes. This verifies the individual’s country of residence and confirms the tax withholding requirements when making payments to these individuals.

Non-resident aliens (NRAs) are subject to a 30% tax on their gross income from a US-based employer. However, if a tax treaty exists between the U.S. and the country of the non-resident alien, they may be eligible for a reduced tax rate, which for many countries is zero. For instance, Canada and the UK are generally exempt from US tax, whereas France and Germany are subject to a reduced tax rate of 30%.

What purpose does a W8 BEN form serve?

The IRS imposes tax regulations on the income companies pay to individuals working for them. The W8 BEN form is asked to be filled out by those who are classified as non-resident aliens, in simple words, those who do not reside in the U.S. These individuals are taxed at different rates.

Foreign status

The IRS applies different tax rates to U.S. citizens, permanent residents (Green Card holders), and non-citizens who work for U.S. organizations but reside outside the U.S. (NRAs). The W8 BEN form is used to certify a person’s foreign status.

Tax treaty benefits

Some countries have income tax treaties with the U.S. that allow their citizens to benefit from reduced tax rates when receiving income from U.S. sources. The W8 BEN form helps determine whether an individual qualifies for these reduced rates based on their residency.

By completing this form, freelancers or beneficial owners can claim any applicable tax benefits under their country’s tax treaty with the U.S. This information allows the employer or withholding agent to apply the appropriate tax rate for income withholding.

Tax Identification Number (TIN)

Another key purpose of the W8 BEN form is to provide a foreign Taxpayer Identification Number (TIN), a unique number used for tax implications. This ensures that the IRS can accurately track and maintain tax records.

This is particularly important when managing freelance/contractor payroll. Ensuring that tax identification details are correctly provided helps streamline operations, reduce compliance risks, and ensure smooth transactions within a growing organization.

Why does the IRS require a W8 BEN form?

When a U.S.-based company or withholding agent is about to make payments, such as dividends, interest, royalties, or wages, to a foreign individual, they should request the W8 BEN form to determine the correct withholding tax rate. If the non-U.S. individual is eligible for a reduced tax rate under a tax treaty between their home country and the U.S., the W8 BEN form must be submitted to claim those benefits. U.S.-based companies hiring non-U.S. contractors or freelancers must request the W8 BEN form to certify foreign status and apply the appropriate withholding tax. Financial institutions often request a W8 BEN form from foreign account holders to confirm non-U.S. tax status and determine applicable tax withholding on interest, dividends, or other income.

Who provides the W8-BEN form?

The employer is responsible for providing the W8 BEN form to international freelancers or contractors during the onboarding process or when setting employment terms. To comply with U.S. tax laws on payments made to foreign individuals or entities, it is essential to collect a completed W8 BEN form from each non-U.S. worker.

It is the individual’s duty to fill out the W8 BEN form and return it to their employer before any payroll is processed. If the form is not submitted or completed correctly, the individual may face a 30% withholding rate, potentially leading to excessive taxation.

How to file a W8-BEN form?

Filing the W8-BEN form is essential for non-U.S. individuals who earn income from U.S. sources to claim tax treaty benefits and avoid excessive withholding. The form is used to certify that your freelancer is not a U.S. citizen or resident, and it helps reduce the withholding tax rate on their income.

1. Obtain the form

You or your freelancer can download the W8-BEN form (PDF) from the official IRS website.

2. Fill out the form: Identification of the beneficial owner

This section is where your freelancer provides his details to identify as the beneficial owner of the income.

Line 1 (name): He/she must enter the full legal name (as it appears on the passport).

Line 2 (country of citizenship): Enter the name of the country in which he/she holds citizenship.

Line 3 (permanent residence address): He/she needs to provide the full permanent address. This should be where he/she ordinarily resides and pays taxes.

Line 4 (U.S. Taxpayer Identification Number, if applicable):

• If your freelancer has a U.S. Individual Taxpayer Identification Number (ITIN) or a Social Security Number (SSN), he/she can enter it here.
• If your freelancer does not have an ITIN or SSN, he/she can leave this blank. However, obtaining an ITIN might help if they want to claim treaty benefits in the future.

Line 5 (Foreign Tax Identification Number): Provide the Foreign Tax Identification Number (FTIN). This is the tax ID issued by his home country (it may be his/her local tax number, VAT number, etc.).

Line 6 (reference number(s)): Leave this blank unless the payer has assigned them a specific reference number.

Line 7 (date of birth): Enter the date of birth in MM-DD-YYYY format.

3. Claim of tax treaty benefits

This section is essential if your freelancer is claiming a reduced tax rate under a tax treaty between his country and the U.S. Otherwise, the default 30% withholding tax will be applied.

Line 8 (country with which the U.S. has a treaty): He/she must enter the name of the country where he/she is a tax resident and with which the U.S. has a tax treaty.

Line 9 (special rates and conditions):

• If applicable, he/she can specify the article and paragraph of the tax treaty under which he/she is claiming the benefits (find these in the tax treaty between the U.S. and his country).
• Enter the rate of withholding claiming (e.g., “0%”, “10%,” etc.).
• Provide a brief explanation of why he/she qualifies for the tax treaty benefits (e.g., “I am a tax resident of [Country] and entitled to the benefits of Article [X] of the U.S.-[Country] income tax treaty.”).

4. Submit the form

After completing the W8-BEN form, your freelancer should send it to your representative. You will need the form to apply the correct tax withholding rate.

• Example: If you are providing royalties to your freelancers, the freelancer must submit the form to you. Your freelancer must also keep a copy of the form for their records.

5. When to file the W8-BEN form

Your freelancers should file the W8-BEN form before they receive payments or income from you to ensure the correct withholding rate is applied.

• Expiry: The W8-BEN form is generally valid for three years unless your freelancer’s circumstances change (such as a change in tax residency or citizenship). After that, they must submit a new form to continue receiving treaty benefits.

What happens if you do not submit the W8-BEN form?

If you do not get the W8-BEN form filled, there are several potential consequences, particularly related to tax withholdings and your professional’s ability to receive payments from your business. Let us look at the consequences below:

1) Withholding tax issues:

• Higher withholding tax: The IRS requires your business to withhold 30% on payments made to foreign individuals if no valid W8-BEN is on file. This includes income such as wages, interest, royalties, or other compensations. This could affect the net payments the freelancers receive and could create frustration or disputes.
• Administrative burden: If the withholding is not done correctly (e.g., the wrong tax rate is applied), you may have to deal with correcting the taxes withheld and possible penalties for non-compliance.

2) Reporting and compliance

• Increased risk for non-compliance: If you do not correctly withhold taxes or comply with IRS regulations because your freelancer did not file a W8-BEN, you could face potential penalties or audits. The IRS expects businesses to handle international freelancer payments properly, which includes accurate withholding based on the information provided in the W8-BEN.
• Additional reporting requirements: Without the W8-BEN form, your business must apply the default withholding rate and report the income and withholding to the IRS, which could complicate the company’s tax filings.

3) Potential impact on relationships

• Freelancer relations: The lack of a W8-BEN could result in your freelancer receiving less money than they expect due to the 30% withholding rate. This could lead to dissatisfaction, complaints, or a strained relationship between you both.

How does Global Squirrels help you ensure compliance when working with freelancers globally?

Global Squirrels is a staffing and payrolling platform that simplifies compliance and payments of your global freelancers. Our subscription-based Freelancer Purple plan is specifically designed to onboard and manage the freelancers already sourced by you. This plan will handle their payments, compliance, leaves, timesheets, and performance management. Your freelancers will sign a proper contract agreement before we onboard them. It will include notice period clauses to ensure they do not abruptly quit while working on your projects and serve full notice before ending their contract.

We understand that obtaining the W8-BEN form from your global freelancers, ensuring accuracy in tax withholding, and processing timely payments to them is tedious, especially for your accounting and HR departments. They also need to manually review the timesheets and take care of payments for your freelancers, which becomes time-consuming and prone to errors and delays. With Global Squirrels’ Freelancer Purple Plan (Agent of Record), all the W8-BEN form requirements, pay disbursements to your freelancers, time management, and liabilities are handled by Global Squirrels.

You can leverage this plan almost at the cost of international wire transfer fees you incur to make payments to each of your freelancers. You end up paying the same fee you currently incur for making international wire transfers, and on top of us handling pay disbursements, you will also get to use a range of practical tools such as multi-country timesheet and leave management, one-time and recurring task assignments, performance management, and more!

Do you want to know more about how our platform works? Request a demo today!