Remote teams give employers a chance to build a dream team without boundaries. For employees, it offers the freedom and flexibility to attain a healthy work-life balance. That’s that but things aren’t always so rosy.
For example, payroll and taxes can be challenging sometimes… It’s not that we haven’t heard all the BS excuses managers come up with against remote teams.
Taxation is one complex area that governments, companies, and individuals are struggling to address as workers become increasingly mobile. Tax codes have simply not caught up to the reality of individuals participating in a globalized workforce.
U.S. companies that make payments to foreign employees are typically needed to reserve a 30% tax on those payments. The company, referred to as the withholding agent, is responsible for deducting and withholding that tax from the contractor’s pay to the Internal Revenue Service (IRS).
Non-US citizens working outside the borders for the U.S are required to withhold a certain amount of their available income for tax purposes and responsible to pay an amount to the IRS.
Long story short, let’s get into those tax forms and how you should fill them.
What is W-8 BEN?
It is a certificate of foreign status for a beneficial owner for US withholding and reporting. Essentially, you’ll use this for owners of US-based income who are not US tax residents so that they can claim tax treaty benefits.
The W-8BEN is a form required by the Internal Revenue Service (IRS), the United States tax agency. The official title of the form is Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting(Individual).
‘‘You must give Form W-8BEN to the withholding agent or payer if you are a nonresident alien who is the beneficial owner of an amount subject to withholding, or if you are an account holder of an FFI documenting yourself as a nonresident alien.’’ according to the official IRS site.
The W-8BEN applies to foreign individuals and sole proprietors who earn money from U.S. sources. Failure to fill out form W-8BEN means the IRS can withhold 30 percent of income earned from U.S. sources. This includes any interest, rents, royalties, and other compensation. You should give Form W-8BEN to the withholding agent or payer if you are not a resident in the US and you are not a citizen of the U.S.
You should also provide Form W-8BEN to a payment settlement entity (PSE) requesting this form if you are a foreign individual receiving payments as a participating payee.
The W-8BEN form confirms to the IRS the following information:
- You are not a U.S. resident
- The individual or owner of the sole proprietorship receiving income from a U.S. source
- You qualify for a tax treaty that exempts you from paying tax to the IRS or reduces the tax withholding rate. Don’t qualify for an exemption? You’ll need to pay the IRS 30 percent of your earnings.
In short, the W-8BEN form determines your status as a foreign individual. Based on your country of origin, the W-8BEN determines how much (if any) tax you owe the IRS.
Expiration of Form W-8BEN
Generally, a Form W-8BEN will remain in effect for purposes of establishing foreign status for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN signed on September 30, 2015, remains valid through December 31, 2018.
What is W-8BEN-E?
The W-8BEN-E is also a form required by the Internal Revenue Service (IRS), the United States tax agency. The official document title is Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities).
It is a form that you will receive already completed by the foreign entity, outlining your income. This form has four main functions: to establish non-US status for the company; claim beneficial owner status; claim exemption from, or reduction in, US tax withholding under Chapter 3; and identify the entity’s category under Chapter 4 of the Foreign Account Tax Compliance Act.
W-8BEN-E is an important tax document that allows businesses operating outside of the U.S. to claim tax exemption on U.S.-sourced income.
The W-8BEN-E is a new form that is available since 2010 thanks to the Foreign Account Tax Compliance Act (FATCA).
With FATCA, IRS could learn more about U.S. citizens who are earning income or investing via international, non-U.S. sources, according to Thomson Reuters. Its focus on cross-border tax compliance also extends to foreign entities doing business with U.S. clients.
The W-8BEN-E is lengthy—it has 30 parts. That said, not all the fields must be completed for a foreign vendor to get paid by a U.S. company. Requirements can differ.
The University of Washington, for example, only requires foreign vendors to fill out:
- Part I
- Part II (if a tax treaty is being claimed)
- Part XXIX
The W-8BEN-E is used for reporting to the IRS information about a non-U.S. company earning money from U.S. employers.
The W-8BEN-E asks for information such as:
- Company name
- Where the company was incorporated or is located
- Organization status (chapter 4 status)
- U.S. or foreign TIN (taxpayer identification number)
- The claim of tax treaty benefits
Organization status refers to whether the business is a foreign government, publicly-traded company, nonprofit company or otherwise.
Tax treaty benefits can only be claimed if there’s a tax treaty between the U.S. and the country where the business is a tax resident, if a tax treaty isn’t in place, non-U.S. entities have to pay a 30 percent tax on their U.S. earnings, according to the IRS.
The W-8BEN-E form can expire too. It only lasts until the end of the 3 calendar year when it was signed. For example, a W-8BEN-E signed in 2012 would be valid for the rest of 2012 as well as 2013, 2014 and 2015. It would expire on January 1, 2016.
Once the W-8BEN-E expires, a new form has to be filled out by the foreign vendor and submitted to its American employer before any more payments can be processed.
The W-8BEN-E also expires if any information on the form changes, such as the address of the foreign vendor. Then a new W-8BEN-E has to be filled out and submitted, according to the University of Washington.
The Difference Between W-8 BEN & W-8 BEN-E
If you want to create an investment account and invest in US products and you are a nonresident alien of the U.S., then W-BEN form and W-8BEN-E forms are relevant to you.
W-8BEN form is used for the following account types:
Both the individuals who are part of the Joint account type need to submit their W-8BEN forms.
W-8BEN-E form is used for the following account types:
• SMSF (individual trustee)
• SMSF (corporate trustee)
To make a long story short, a partnership or corporation should declare their status via IRS forms such as the W-8BEN-E. A foreign individual or sole holder receiving US income do not need to declare their status but will need to file a W-8BEN form.
Filling out the tax forms
Identification of Beneficial Owner (Part I):
- For W-8BEN (individuals): Name — Enter your legally given name as shown on your income tax return.
- For W-8BEN-E (entity): Name of Organization — Enter the full legal name of your organization. If you are a disregarded entity, enter the name of the entity that owns the disregarded entity.
- Address (State, City, Address, Address 2, Zip) — For Address, include the building number and street name (e.g., “52 Market Street”). For Address 2, include the apartment, suite, unit, building, or floor number.
- Foreign Tax Identifying Number(TIN)— Enter your tax identification number issued from your country of residence. If you don’t have one, put your ID number instead.
Then, and if the person or company home country has a specific tax treaty with the US, we would then apply the exact treaty provision for mitigating (reducing) the withholding required.
A claim of Treaty Benefits (Part II)
List of countries
According to IRS, here’s the full list: Armenia, Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, India, Hungary, Iceland, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Korea (South), Luxembourg, Mexico, Malta, Moldova, Morocco, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Tunisia, Trinidad and Tobago, Turkey, Turkmenistan, Ukraine, United Kingdom, United States, Uzbekistan, Venezuela
Certification (Part III):
Sign with your full legal name, and add the date of the signature.
It’s best to review the form with your tax advisor so you can properly complete it.
Don’t let the complexity of payroll and taxes stop you
Hiring remotely can get complicated because of all the edge cases and legal gray areas.
While the best structure for your business to hire, manage taxes, and pay remote employees depends on the unique characteristics of your business, there are a few guidelines every business should follow:
- Look for simplicity: Paying a few dollars for a service that saves hours of your time and (potentially) thousands in taxes and fines is worth it.
- Make sure the arrangement is beneficial to both sides: You don’t want to put your employees into a situation where they have to pay thousands in fees and/or taxes.
- Don’t optimize at the cost of violating laws: It is guaranteed to come back and bite you when you least expect it.
- Manage W-8 Ben & W-8 Ben-E contracts easier: Use RemoteTeam document signature feature online.
Compared to the benefits you can get, hiring remotely is definitely worth the hassle. Nothing can give your business the same advantage as having access to global talent.