What is the W-8 Tax Form Series and Who Can Use It?

w-8ben form for foriegn tax filersWhen it comes to paying your taxes and filling out the proper forms, the US government has W-8 tax forms specifically for non US persons doing business in the United States.

Form W-8BEN is formally known as a Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. This particular series of forms are used by foreign persons and businesses to certify they are not US residents. Foreign citizens are taxed at a rate of 30% on the income the receive from the business owner in the United States. Tax forms can be very confusing, here is a detailed explanation of the W-8 tax form and how it applies to you and the amount of taxes you will eventually pay.

Whenever a foreign person receives a payment from a client in the United States, the taxes are withheld by the payor at the 30% rate. The withheld taxes are then paid the the US Internal Revenue Service. If the payor has hired non US person, this tax rate applies, it does not affect citizens of the United States.

One of the most frequent uses of the W-8BEN forms is to show mutual fund and stock companies that the foreign investor is not subject to the normal tax rate that many investors face when buying and selling stocks and bonds. This form is very important in allowing the foreign person to be taxed at a rate that is not typical to most US investors.

The W-8 tax form series is designed for foreign persons to complete, whereas US citizens would complete the W-9 form. The foreign payee is subject to tax on certain types of income. Taxes will be withheld on foreign workers for services performed, income, dividends, rent payments, royalties, premiums, securities, annuities, periodic gains and many types of interest. If a non-US person has received any compensation from these sources, then the appropriate W-8 tax form will need to be filled out.

There are certain types of income that non-US payees will not be subjected to withholding. If a foreign person has any broker proceeds like the sale of stocks or securities than the withholding will not apply and the W-8 forms are not applicable. An OID (original issue discount) of less than 183 days is considered short term and also is not subject to the tax rate. Other types such as bank deposit interest, foreign royalties, rents and foreign interest are not subject to the tax.

A payee may still be required to use the form W-8 series to claim exceptions and for reporting backup withholdings. Whether the foreign payee is a business or individual, if he qualifies for the taxes to be withheld, he must submit a W-8 to the payor of the money. The W-8 series forms are not to be submitted to the IRS or they will be returned. The recipient of the income must fill out a form like W-8BEN, and sign and date it and submit to the payee.

If you submit a W-8 form you must keep the form up to date.

Many people assume that once the form has been submitted that they are not responsible to update the information. If the information is allowed to become dated, and becomes inaccurate, the foreign person can have the improper tax amount withheld. If you have had your taxes submitted incorrectly, requesting a refund from the IRS is not only a cumbersome undertaking, it can take six months for the refund to process.

If you have filled out a W-8BEN tax form, and have not provided the payee with a US taxpayer identification number or TIN, your form will remain valid for up to three years from the date you placed on the form.

If you have provided a valid taxpayer identification number, your form will stay valid until either a change in your status or information is provided to make details on your form incorrect.
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The IRS has many forms that are designed to make applying for certain rates, and if you are not familiar with the forms you could be subjecting yourself to overpaying taxes or underpaying and receiving significant penalties. The IRS is currently understaffed due to cut backs at the high levels, and mistakes can take months to be addressed and corrected. Better to understand the forms in advance so you are not subjected to months or longer, trying to retrieve any monies you are owed for filing incorrectly.