The American tax system is highly complex and very different from other countries and their foreign governments. Many tax forms are used in the United States to report various types of income, expenses and deductions.
Even the names of the forms can be confusing, W8EN(E) and W9 respectively. These numbers and letters are a way to organize forms customized to the U.S. Tax Code.
If you’re a U.S. company hiring an individual doing any sort of work such as freelancing or contracting, you may be aware of these forms, since many of them are used by foreign entities to document their status for various reasons.
Did you know there are five W8 form types present in the U.S. Tax Code? The five W8 forms include the W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and the W-8IMY.
In this article, we’ll break down the nine most common types of U.S. tax forms that independent contractors working for U.S. companies will come across and what they mean for U.S. employers.
Form W-8BEN
W-8BEN is a tax form used by non-U.S. citizens to certify their foreign status and claim a reduced tax withholding rate on income received from the U.S. Form W-8BEN is also referred to as the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting.
The W-8BEN form is used to establish an income that is effectively connected with a foreign country and is therefore subject to a lower United States tax withholding rate or is exempt from U.S. taxation altogether.
It is also important to note that the W-8BEN form is not used to claim tax treaty benefits but rather to establish an individual’s foreign status. U.S. citizens do not have to worry about the W-8BEN tax form.
The W-8BEN is valid for three years and must be reissued after that period. U.S. employers must collect a W-8BEN from a foreign contractor, or they will need to withhold 30% worth of income tax from their pay.
The W-8BEN forms are not submitted to the Internal Revenue Service (IRS) but need to be kept on file for every foreign contractor hired. The various kinds of W-8 forms are to be submitted only to payers or a withholding agent. Non-US independent contractors or those who have directly invested in U.S. markets are required to submit the W-8BEN to track the income generated while contracted by American companies.
Foreign contractors who receive income from the U.S. including but not limited to dividends, interest, royalties and other types of income are strongly advised to check their requirements in filing a W-8BEN form.
W-8BEN-E
W-8BEN-E is a tax form used by foreign businesses or entities to certify their foreign status and claim a reduced withholding tax rate on income received from the U.S. foreign businesses and entities consist of but are not limited to corporations, partnerships, trusts, and even foreign central banks.
The most important thing companies need to know is that like the W-8BEN form, the W-8BEN-E form is not used to claim treaty benefits but to establish foreign status. If your entity is eligible for a tax treaty benefit, it may require completing additional forms to claim the benefits. Indeed, it is similar to the W-8BEN form used by individuals, but the W-8BEN-E is specifically designed for entities.
Likewise, the W-8BEN-E applies to non-U.S. citizens operating as a sole proprietorship, a single-member limited liability company (LLC), or other formal business structures within a foreign country that is generating income from American companies. There are many nuances between formal business structures all around the world. Those operating as these structures should clarify their business structure to properly file a W-8BEN-E.
W-9
The W-9 tax form applies to all U.S.-based entities and operations. All U.S. citizens and U.S. residents regardless of citizenship are required to complete this form.
Employers must provide the W-9 to U.S.-based individuals or companies outside of their business. This form is required to file an information return with the IRS. This form is also used typically by U.S. employers who need to report payments made to the payee to the IRS and keep them on file.
This form is, however, not submitted to the IRS. Instead, the W-9 is kept on file by the payer for future reference. The information provided on the W-9 form is used to prepare Form 1099.
Although the W-9 is not submitted to the IRS, the information provided on the W-9 form is used by the payer to report income to the IRS, and failure to provide accurate information on the form may result in penalties or other consequences. Therefore, it is still important to review the information provided on the form carefully before submitting it to the payer.
W-4
The W-4 (Employee's Withholding Certificate) is a tax form used by employees to indicate their withholding preferences for federal income tax. This form does not apply to freelancers or contractors.
If the U.S. is not the country of residence, but the individual is an employee at a US company, they are also unlikely to be asked to fill out the W-4 form since they’re not paying federal income taxes to the US. Instead, they will be asked to fill out the W-8BEN form to certify their foreign status.
The W-4 is typically completed by new employees who live in the U.S. when they start a job or when an employee's tax situation changes. The form calculates the amount of federal income tax that should be withheld from the employee's paycheck based on their filing status, number of dependents, and other factors.
The employee can choose to have more or less tax withheld from their paycheck by adjusting the allowances they claim on the form.
Employees who already have one on file with their current employers do not have to fill another one out every year. However, it is a good habit for both employers and employees to review and update the W-4 form periodically to ensure that the correct amount of federal income tax is being withheld from the employee's paycheck. This can help both parties prevent unexpected tax bills or refunds at the end of the year.
W-2
The W-2 is a tax form used by U.S. employers to report wages, tips, and other compensation paid to employees, as well as the taxes withheld from those payments. The form includes social security taxes and records of contributions to other benefits such as health plans or retirement savings plans.
This form is filled out in addition to an employee’s earnings and is typically provided to employees by the end of January following the end of the tax year so employees can file personal taxes themselves. Like the W-4, this tax form does not apply to non-U.S. contractors or freelancers.
1099
There are 21 different 1099 forms used by taxpayers to provide information to the IRS about all of the different types of income they receive on top of their regular salary throughout the tax year. Along with the various types of income, you may also be asked to provide additional information such as your individual taxpayer identification number (TIN), permanent residence address, etc.
The form is typically provided by a payer (an employer or company) to the recipient (an employee or independent contractor) and also to the IRS. The following are the main types of 1099 forms that employers should be aware of:
1. 1099-NEC
1099-NEC is a tax form that reports non-employee compensation. "NEC" is short for "non-employee compensation," and the form was reintroduced again in 2020 after it was previously replaced in 1982 by the 1099-MISC form.
The 1099-NEC reports compensation made to independent contractors, freelancers, and other non-employees who provided services to a business. Businesses are required to file a 1099-NEC for each independent contractor to whom they paid $600 or more in non-employee compensation during the tax year.
However, if the contractor is a non-U.S. citizen and all of the services performed by them were conducted overseas, then employers do not have to issue a 1099-NEC to the contractor.
It is important to note that the 1099-NEC is separate from the 1099-MISC form.
2. 1099-MISC
The 1099-MISC form is used to report miscellaneous income that is not considered salary, wages, or tips. While the 1099-NEC was reintroduced after the 1099-MISC, this form is still used today and differs from the 1099-NEC.
The 1099-MISC is used to report payments made to individuals or businesses who are not employees of the business.
The types of income reported on a 1099-MISC form can include rents, royalties, and other types of income made to independent contractors and freelancers. Additionally, it is also used to report other types of income, such as prizes and awards, medical and health care payments, and payments to attorneys.
Businesses are required to file 1099-MISC for each individual or business to whom they’ve paid $600 or more in miscellaneous income during the tax year unless - similar to the 1099-NEC - they are a non-U.S. citizen or business entity.
3. 1099-DIV & 1099-INT
The 1099-DIV form reports dividends and capital gain distributions paid to investors. Meanwhile, the 1099-INT is a tax form that reports interest income paid to investors.
Both the 1099-DIV and the 1099-INT are provided by banks, mutual funds, and other financial institutions to customers who received dividend or capital gain distributions of $10 or more during each tax year.
Foreign investors who earn dividends and interest income from U.S. sources are generally subject to U.S. taxes on that income and may receive a 1099-DIV or 1099-INT.
Under U.S. tax laws, this income is subject to a 30% tax unless a lower rate is provided under an income tax treaty. For interest income, the tax rate may be different depending on the type of interest income earned and whether a tax treaty applies. However, there are exceptions and exemptions to this rule. For example, foreign investors who invest in U.S. stocks through a tax-deferred retirement account, such as an Individual Retirement Account (IRA) or a 401(k) plan, are generally not subject to U.S. taxes on the dividends and interest earned inside the account until withdrawal.
This is important for U.S. employers because it is common for employees to enroll in IRAs and 401(k)s. This may subject both employers and employees to tax implications. Even if taxes are not owed on these types of compensation and benefits, both parties will be able to refer to their income for that year and report it in different places on their tax returns depending on what type of income it is when filing.
Prevent Tax Withholding with a W-9 and W-8 Form
All foreign entities that are operating or conducting business in the United States are legally required to fill out and document the W-8BEN(E)s and W-9 tax forms for their annual business transactions that take place in the United States. These forms are used for a multitude of reasons, including assisting foreign entities from unnecessary tax withholdings on their U.S. income.
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