In the words of Benjamin Franklin, ”In this world, nothing is certain but death and taxes.” As an employer in the United States, reporting income paid to your workers for taxation purposes is a requirement—even if those workers are outside the country.
But how do you report that income compliantly?
Which tax forms do you need to collect and file for each type of worker?
While it’s fairly straightforward to sort out the W-8 vs. a W-9 form, it can be confusing to understand all the varieties of W-8 forms available for tax reporting.
Tax forms W-8 and W-9: Purpose and key differences
In the United States, the Internal Revenue Service (IRS) determines an individual's income tax liability. As a U.S. business, it’s your responsibility to provide the IRS with information on:
- Who you pay
- How much
- For what purpose
It is also your responsibility to calculate appropriate tax withholdings and pay those to the IRS. This is a safety net that the IRS uses to ensure they collect their taxes. Failing to comply could result in significant fines for your business.
Both the form W-8 and form W-9 are U.S. tax forms designed to provide the IRS with information on an individual’s tax status. The main difference between a W-8 vs. W-9 form identifies whether the payee is a citizen, resident, or foreigner for income tax purposes.
Filling out the appropriate W-8 or W-9 forms identifies each payee relationship to your company and how they should be taxed under the U.S. tax code. At the end of the year, you will file a 1099 form based on the information collected on both W-8 and W-9 forms. Failing to file the appropriate forms could result in higher tax liabilities for your company, so it’s important to get it right the first time.
What is a W-9 tax form?
A form W-9, or ‘Request for Taxpayer Identification and Certification’ is for U.S. residents and citizens. This form documents the name, address, and social security number or tax identification number for individuals who are responsible for paying their own income taxes in the United States.
United States residents and citizens are taxed on a sliding scale based on how much they earn.
You must file a form W-9 for all U.S. residents and citizens paid by your company as an employee, contractor, or vendor.
What is a W-8 form tax form?
Form W-8 is a bit more complicated. The variations of this form are for non-citizens and non-residents of the United States who are paid by a U.S.-based company as an employee, contractor, or vendor.
Typically, a foreigner earning income from a U.S.-based company is obligated to pay a 30% tax on gross income, but that might vary depending on the circumstances. This is why you’ll find five different W-8 forms.
The five types of W-8 forms are:
- W8 BEN - Individuals
- W8 BEN-E - Organizations
- W8 ECI - Trade or Business Related Activities
- W8 EXP - Tax Exempt Organizations
- W8 IMY - Intermediaries
A salaried employee is paid and taxed differently than a contractor. Vendors providing goods or services are paid and taxed differently than brokers who arrange those services.
There are even differences between paying and taxing entities in different countries. Your employees, vendors or contractors in one country might be treated differently for tax purposes than those in another country with more favorable trade agreements with the U.S. Tax treaties between different nations can impact the total taxes paid by foreign workers.
Which W-8 form do I need?
Now that we’ve established the difference between W-8 vs. W-9 forms, let’s cover the different types of W-8 forms and their appropriate uses.
W-8BEN form
The most common W-8 form is the W-8BEN, or the ‘Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting’.
The purpose of this form is to identify an individual payee as having a foreign status—and it applies to both international employees and independent contractors.
Filing the W-8BEN does not exempt foreign employees from income tax liability. U.S.-based employers are typically obligated to withhold taxes for W-8BEN foreign employees. The typical tax rate for foreign employees is a standard 30%, but that amount can vary depending on factors like country of residence and whether or not they have a tax treaty with the U.S. Foreign employees looking for a reduced or exempt tax status should complete an alternative W-8 form.
Your business is not required, however, to withhold taxes from foreign independent contractors if you collect the appropriate documentation. The W-8BEN confirms that the individual is not a U.S. citizen and is not working within the U.S. If both apply, the contractor does not need to pay taxes to the U.S. government (of course, they are responsible to pay taxes in their own country as required).
Keep in mind, if you fail to collect a complete W-8BEN for a foreign independent contractor, you must still withhold 30% of your payments to foreign contractors for taxes.
Related: Working with foreign independent contractors? Simplify tax compliance with Contractor Unity.
W-8 BEN-E form
Another version of the BEN is the BEN-E, or the ‘Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting’. This form identifies an entity—like a corporation, partnership, estate, etc.—as a foreign entity for tax purposes.
Form BEN-E is appropriate for foreign entities profiting from your business in the form of interest, dividends, royalty payments, rents, annuities, etc. or those claiming a reduction or exemption based on treaty status.
Will these entities pay taxes on this U.S.-earned income? It’s possible. Under U.S. tax law, you may be obligated to withhold a 30% income tax when paying foreign entities.
W-8 ECI form
Next up is the form for effectively connected income (ECI), officially known as ‘Certificate of Foreign Person’s Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States’.
That’s a mouthful!
The ECI identifies payees who receive payments from a U.S.-based company as the result of engaging in trade or business with them.
What’s the difference between foreign payees (BEN-E) and effectively connected income?
- W-8BEN-E is typically for passive income (e.g. investment dividends, royalty payments), while W-8ECI is for active business income.
- W-8ECI implies a more substantial U.S. business presence than W-8BEN-E, and as such, income on W-8ECI is generally not subject to withholding (the business is already taxed like a U.S. business).
W-8EXP form
Certain types of foreign organizations will use form W-8EXP, or ‘Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting.’
This form identifies foreign entities with a tax-exempt status, such as government agencies, foundations, and not-for-profit (NPO) organizations. Just as nonprofits are tax-exempt in the United States, similar rules apply for foreign organizations with tax-exempt status.
This form identifies foreign payees with a tax-exempt status who are not subject to income taxation on payments your company makes to them.
W-8 IMY
The final type of W-8 is the IMY, or ‘Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting.’
This form identifies foreign entities who receive payments on behalf of someone else.
For example, a partnership where each partner will file income taxes on their individual returns, acts as a flow-through of information with obligated income reporting to the IRS.
Similarly, a payroll processor acting on behalf of another company, distributing payments to foreign employees in another country, is also an example of a flow-through payee. Your company pays the payroll provider, and the provider distributes the payments to the designated payees.
It’s like chain-of-custody reporting for the IRS so they can follow the money trail.
When and how to collect the right tax documents
Whether the entity you’re engaging with is a United States citizen or a foreigner, employee, contractor or vendor, the same advice applies:
Collect and document tax status before any money changes hands.
Getting a complete and correct W-9 or W-8 form should be part of your onboarding process.
1. Verify citizenship status
If your employee, contractor or vendor is a U.S. citizen or legal resident, use form W-9 and withhold income taxes calculated on a graduated basis. If they are a non-resident or a resident living in another country, use the appropriate form W-8 for their situation.
2. Choose the right form W-8
For foreign individuals earning income from a U.S.-based company, you’ll need to ask a few more questions. For example:
- How is each individual worker classified (independent contractor vs. employee)?
- What country is the individual or entity located in?
- Does this country have a tax treaty with the United States that lowers income tax rates below the standard 30% of gross income?
- Is this entity the end recipient or a pass-through entity like a payroll processor?
These questions will help you determine the right type of W-8.
For independent contractors, as well as employees earning wages and salaries, use form W-8 BEN.
3. Review and validate
Before issuing any payments, review all tax forms for completeness and accuracy. Verify that the employee, contractor or vendor provided information that matches your records. Enter your W-8 or W-9 forms into your payroll accounting software and make sure that the appropriate withholding rates are set.
Now, you’re ready to get to work. Your new employee, contractor, or vendor can begin working and earning income from your company—and you can pay them while staying in compliance with the IRS.
4. Don’t skip record maintenance
W-8 forms are valid for three years. They expire on December 31 of the third year. You will need a process for identifying and updating tax forms for any employee, contractor, or vendor relationship that lasts longer than three years.
The bottom line on W-8 and W-9 forms
The W-8 and W-9 forms both document how a recipient of income from a U.S.-based company is taxed. The difference is, the W8 form is for foreigners and the W9 is for U.S. citizens or legal residents.
You should be collecting either a W-8 or a W-9 form from every individual or entity that your organization issues payments to—and you should have a procedure in place to collect and document this information before any money changes hands.
The right payroll provider can simplify this process and help ensure your compliance with local tax regulations.
If you’re looking to hire and pay employees in other countries, consider using an employer of record. If you’re working with foreign independent contractors, check out the advantages of Contractor Unity.
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