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W-8 Forms can be a real struggle for non-U.S. citizens to understand, and when U.S. companies ask them to fill out a W-8 form, they are left confused about what information to provide. As a result, there are many articles connected with these forms. However, we noticed they are usually too complex to understand or do not include the correct data.
If you are a professional working in IT, nowadays there are high chances you will work on a project for a United States company at some point in your career. Especially for engineers or UX/UI designers, there are vast opportunities for remote work in the U.S. marketplace. When this happens, it is essential to know how to deal with W-8 forms' complexity, why they are important and what consequences a lack of a W-8 form in a partnership with a U.S. company might have.
To simplify this for all international contractors facing the flood of information about W-8 forms, here are concrete answers, so just keep reading.
What Is the W-8 Form and Why It’s Important?
The W-8 form is an IRS (Internal Revenue Service) tax form, which primary purpose is to clarify how much tax (if any) you are required to pay to the U.S. tax authorities as a foreign contractor. The most important thing to remember is that it is essential to submit the form to any of the U.S. companies you are working for. Why?
Even when there is no tax to be withheld, the IRS needs proof that the payment to the foreign professional was tax-exempt and you were eligible to receive your payout in full. W-8 form serves as such proof in case the company gets audited by the IRS. So, companies registered and operating in the U.S. are obliged to collect it from all foreign professionals who have received their payment.
Simply, it is the U.S. company’s responsibility to ask you for this form, and it is your responsibility to submit it to them.
Let’s put this to practice. Imagine you have done some work for a U.S. company while living anywhere else in the world. Now, when sending the invoice for your services, you forgot to attach the W-8 form the company asked you to sign. Probably you found it too confusing to fill out or just didn’t have the time to be bothered. Shortly after, you got your payment and there were consequences.
Since your client did not receive W-8 from you, they had to withhold 30% of your payment and you received only the 70% of the agreed amount. Remember, in order not to do so, they would need to prove that the transaction they made for you was tax-exempt.
Because you didn’t provide such proof, your client was required to withhold the tax just in case they would be under audit and need to give the authorities a verification of the tax-exempt payment.
Tax-Exempt or Not?
One of the most critical questions that can occur to you when filling out the form is asking yourself if your income is U.S. sourced since this significantly affects how to fill out the form. Simply put, if you have to pay taxes in the U.S., your income is considered U.S sourced. If you don’t, you are tax-exempt.
U.S. sourced income is all income received from U.S. companies or individuals for work performed in the U.S. If you work from anywhere else, e.g., Europe (the question of your work location), your income is NOT U.S. sourced.
To simplify all of the above, there are three questions you should answer to know whether you should receive full or reduced payment:
- Are you living/residing in the U.S.?
- Are you a U.S. citizen?
- Do you perform your services in the U.S. (actually working in the U.S.)?
All Questions Answered With NO
When the answer to all of the above is no, there is no need to worry. This is the case with most non-U.S. contractors working from abroad and they are not eligible for tax deductions from payments. However, it is still crucial to remember and submit the W-8 form to your U.S. client, so they will have the confirmation and will be able to transfer your full payment.
Any of the Questions Answered With YES
If you answered any of the questions above with yes, you need to fill out the W-8 form more in-depth than stated in this blog series. An example of this would be living in the U.S. or performing services there. On another note, maybe you are even a U.S. citizen or legal resident and need to fill out the W-9 form. In both cases, you should research your options. For example, consult the official IRS webpage, where you will find detailed information.
Which W-8 Form Is Right for Me?
There are two most common W-8 forms: W-8BEN and W-8BEN-E. Before filling out any of them, the first step is making sure to know which one applies to your case.
- All individuals and sole proprietorships need to fill out the W-8BEN form.
- Businesses (LLCs, corporations, etc.) need to fill out the W-8BEN-E form.
As you can notice, deciding on the W-8BEN or W-8BEN-E form is pretty simple. The challenge usually starts when filling in the data.
Which one is relevant to you? Which fields should you fill out if you are a foreign non-U.S. contractor? To not give yourself a headache, follow us and find out all the answers in the upcoming articles.
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This blog post is only the first of the series ‘W-8 Forms Made Simple’, giving all the general information you need about W-8 Forms. To get the information you need to fill out a W-8BEN form if you are a non-U.S. IT professional working overseas, check out the second article:
The final article (coming soon):
- How Should An Engineer Fill Out W-8BEN-E Form?
*These rules do not count as legal or tax advice. A person must contact legal or tax professionals to verify their accuracy. Povio, Inc. nor the author herself accept no material or legal responsibility for the content of the following rules. Consult with a certified tax advisor or check the official IRS instructions if in doubt.
