Form W-8BEN: 5 Key Questions for US Companies
September 8, 2023
At a glance
- The main takeaway: As more US companies embrace remote work, their leaders are facing more questions about Form W-8BEN, which is an essential tax reporting tool for businesses contracting work across borders.
- Impact on your business: If you fail to file Form W-8BEN or file it incorrectly, you could run into costly tax consequences further down the line.
- Next steps: Aprio’s International Tax Team is here to help you wade through the complexity and answer your most pressing questions about the filing process.
The full story:
With the advent of remote work and advances in technology, US companies are hiring global contractors to perform everything from recruiting to IT consulting. Now more than ever, companies literally have a world of hiring opportunities at their fingertips — but what’s the catch? How can companies protect themselves from a tax perspective?
Enter Form W-8BEN, which is filed by a foreign person or entity who is accepting payment for contracting services rendered by a US company. Here is a list of frequently asked questions about the Form, and how Aprio’s International Tax Team can help you navigate the filing process with accuracy and efficiency.
1. What is Form W-8BEN and why is it important?
From a recordkeeping standpoint, the main purpose of Form W-8BEN is to establish the foreign status of the recipient of certain payments. The foreign recipient (which may be an individual or an entity, such as a corporation or another type of organization) uses the Form to:
- Establish that they are not a US person or entity;
- Claim that they are the beneficial owner of the income for which Form W-8BEN is being provided or a foreign partner in a partnership subject to Section 1446(a); and
- If applicable, claim a reduced rate of, or exemption from, withholding as a resident of a foreign country with which the US has an income tax treaty and who is eligible for treaty benefits.
2. Who fills out the Form?
US companies should request a completed Form W-8BEN from the foreign person and/or entity that is receiving passive income or payments for certain types of services from US sources. Let’s say that a US company is contracting an overseas architectural firm to provide consulting services on its new office design project, or hiring developers to create a new app. The contractors performing this work would need to fill out and submit Form W-8BEN at the outset. Other examples of foreign contractors who may need to file the Form include IT concierge, legal administrators, bookkeepers and customer support representatives.
Individuals file the standard Form W-8BEN, while entities fill out its variation, Form W-8BEN-E.
3. What are the risks of not filing the Form?
If a US company does not have Form W-8BEN on record for its foreign contractors, the income obtained by the contractors for the services rendered could be subject to a default withholding rate of 30%. There are several different types of US income subject to the 30% withholding rate, including:
- Compensation for services performed
- Gains from a sale
The real danger of failing to file Form W-8BEN is that US companies could be exposed to backup withholdings. At Aprio, we have seen this issue come up most frequently in due diligence proceedings, in which a client is going through the process of buying or selling a business. For instance, if a company has outsourced services overseas for many years and has never collected Form W-8BEN from its foreign contractors, then there could be several years’ worth of backup withholdings due to the IRS. This could make the company less attractive from a sale perspective, as it would be on the buyer to collect those taxes from recipients — a potentially arduous and time-consuming endeavor.
4. Is there a deadline to file Form W-8BEN?
Since the form is not required by the IRS and is purely for informational and recordkeeping purposes, there is no hard deadline to adhere to; however, as soon as you engage a foreign person or company to perform services or receive income, it is essential to request the Form and make sure you have it on file due to the potential risks described above.
Generally, Form W-8BEN will remain in effect for three years, unless a change in circumstances makes any information on the form incorrect, such as a situation in which the foreign recipient changes their tax entity, name or address. Your company would have to renew the form in the event of those changes.
5. What steps should I take next?
If you have already requested the Form W-8BEN from foreign contractors you are working with, Aprio’s International Tax Team can help ensure the Form is completed and filed in the appropriate manner. We can also review your financial statements and analyze expenses to see if there are certain items that may indicate that a Form W-8BEN is required, in addition to helping you obtain applicable tax ID numbers.
Aside from the form filing process, there are also more complex situations the Aprio team can help you navigate — such as the process of claiming tax treaty benefits, which depends on the type of income your foreign contractor is collecting. If the contractor performs 100% of their services outside of the US, then no treaty is needed to have zero income tax withholding. However, if the contractor performs the services partially or fully in the US, then the Form W-8BEN filing process can become quite complicated, which is where the expertise of an experienced professional team can help.
If you are preparing to or currently working with foreign contractors and need W-8BEN filing assistance, schedule a consultation with Aprio’s International Tax advisors today.