If you’re a small business owner working with businesses operating outside the U.S., you might need to request they fill out a W-8BEN form for tax purposes. Let’s go over what the form does, why it’s necessary, and how to go about filing.
What Is a W-8BEN?
Also known as the Certificate for Foreign Status of Beneficial Owner for U.S. Tax Withholding, a W-8BEN is for foreign entities. If you’re working with a business outside the U.S., they’ll need to fill out and file a W-8BEN.
“A W-8BEN is necessary to establish a foreign person’s withholding tax rate,” says Logan Allec, a CPA and founder of Money Done Right. Individuals need to fill one out to establish beneficial ownership and foreign status. It’s used to claim any income tax treaty benefits that have to do with income outside of compensation for personal services.
As Allec explains, typically, a U.S. company that pays a foreign person doing business in the United States must withhold 30% of any payment made to that individual.
This is to make sure that Uncle Sam gets his due from the foreign person’s earnings. In turn, a U.S. company will need a W-8BEN on file from its foreign payees to justify withholding 30% from their payments.
However, the W-8BEN serves another purpose than just justifying the 30% withholding.
“If a foreign person’s country has a tax treaty in place with the United States, that would justify a reduced withholding rate or even a withholding exemption,” says Allec.
Why Is the W-8 Form Necessary?
If you’re a small business owner who is making a payment to someone who is — or might be — a foreign person, you’ll need to request a W-8 form.
What’s more, if you’re in a business partnership with someone who lives outside the U.S., you’ll need to withhold tax on their distributive share of their taxable income. Make sure to request the form before making a payment; you’ll need it before you file your taxes.
If a foreign business doesn’t obtain a valid W-8 form and doesn’t withhold as required, they might be taxed at the 30 percent rate under Chapter 3 or 4, or at the 28 percent backup withholding rate that’s under section 3406. What’s more, they also might be dinged with penalties and interest for not complying.
What exactly is Chapter 3 and Chapter 4? In a nutshell, Chapter 3 and Chapter 4 refer to tax withholding types. Chapter 3 withholding has to do with payments made to someone who is a foreign person. Chapter 4 withholding has to do with a foreign financial institution making a payment to an account holder.
To get further specifics on exactly who is subject to either Chapter 3 or Chapter 4 withholding, you can refer to the section in Publication 515 (Withholding of Tax on Nonresident Aliens and Foreign Entities) titled “Persons Subject to Chapter 3 or Chapter 4 Withholding.”
When a taxpayer is subject to a Section 3406 or “C” notice, the taxpayer will be subject to a 24 percent withholding notice. This will be deducted from future interest and dividend payments. Once the taxpayer receives notice from the IRS that they’re no longer liable, then can stop the backup withholding.
When Should You Request a W-8BEN Form?
If you’re making a payment of an amount that’s subject to either a withholdable payment or Chapter 3 withholding, you’ll need to withhold taxes at the required 30 percent rate under Chapter 3 or 4.
Some businesses make the mistake of filling out the W-8BEN form themselves, explains Allec. “They shouldn’t. That’s because about five years ago the Form W-8BEN is only to be used to certify foreign persons, not businesses,” he says. “Businesses should use another Form W-8, such as Form W-8BEN-E.”
Another mistake? Sending the W-8BEN to the IRS. “Similar to Form W-9 for U.S. persons, the Form W-8BEN is not actually filed with the IRS,” says Allec. “The Form W-8BEN is simply completed, signed and submitted to the U.S. payor.”
How to File a W-8BEN Form
For a business outside the U.S. to file a W-8 form, they’ll need to download a W-8BEN form and fill it out accordingly. If the foreign business can link up the payment with a W-8 form, they might be able to withhold at a reduced rate or qualify for an exemption from withholding altogether.
If you have questions specific to your situation, you’ll want to talk to a tax professional. Incfile’s team of tax experts can also answer any questions you might have on how to properly make payments to foreign individuals or companies when running your small business.