W-8 vs. W-9 form: What is the difference and which do I need?

The famous Benjamin Franklin quotes, "In this world, nothing is certain but death and taxes." As an employer running a business/organization in the United States, reporting the income you have paid to your workers for tax purposes is mandatory, regardless of where those workers live, inside or outside the country.

But the question snoops in is, how do you report that income compliantly? Or, which tax form do you need to collect and file for each type of worker?

While it is generally straightforward to sort out the W-8 vs. W-9 form, it can also be confusing to understand all the other varieties of W-8 forms available for tax reporting.

In this blog, we will discuss both W-8 and W-9 forms, their purposes, key differences, types, and more.

The IRS Form W-8 & W-9 - The Purpose And The Key Difference

In the US, the IRS (Internal Revenue Service) determines an individual's income tax liability. As a US business, it is your utmost responsibility to ensure that the IRS has the information on:

• Who You Pay
• How Much
• For What Purpose

It is also your responsibility as a taxpayer to calculate the appropriate tax withholding and pay it to the IRS. This is a kind of safety net the IRS uses to ensure it collects its taxes. And if you fail to comply with this, it results in significant fines for your business.

Forms W-8 and W-9 are tax forms used to provide the IRS with information on an individual's tax status. The only difference between the two forms of identification is whether the payee is a resident, citizen, or foreign individual for income tax purposes.

Filing out the appropriate W-8 or W-9 forms determines each payee's relationship to your company and how they should be taxed under the US tax code. At the end of the year, you are required to file a 1099 Form depending on the information collected on both W-8 and W-9 forms. Failing to do so will result in higher tax implications for your company, so it is quite important to get it right the first time.

W-8BEN vs W-9 comparison

What Is A W-9 Tax Form

The W-9 tax form, or a "Request For Taxpayer Identification & Certificate," is for the US residents and citizens. This form documents the name, addresses, and the Social Security number (SSN) or tax identification number for individuals who are required to pay their own income tax in the US.

United States residents and citizens are taxed on a sliding scale based on how much they have earned.

You must file a Form W-9 for all US residents and citizens who are paid by your company as employees, contractors, or vendors.

What Is A W-8 Tax Form

Now, as compared to W-9, W-8 is a bit more complex. The variations of this form are for the non-citizens and non-residents of the United States who are paid by a US-based company as an employer, vendor, or contractor.

Typically, a foreign-earned individual from a US-based company is subject to a 30% tax on gross income, but that may vary depending on the circumstances. This is also the reason why there are five types of W-8 forms.

The types of W-8 forms are:

• W8 BEN - Individuals.
• W8 BEN-E - Organizations.
• W8 ECI - Trade or Business-Related Activities.
• W8 EXP- Tax Exempt Organizations.
• W8 IMY- Intermediaries

A salaried employee is paid and taxed very differently from a contractor. Vendors that are providing goods or services are paid and taxed very differently from brokers who arrange those services.

There are several differences between paying and taxing entities across countries. Your employees, contractors, or vendors in the country might be treated differently for tax purposes than those in another country with more favorable trade agreements with the US. Tax treaties between other nations can affect the total taxes paid by foreign workers.

Which Type Of W-8 Form Do You Need?

By now, we have understood the difference between the W-8 and W-9 forms. Let us now understand the different types of W-8 forms and their appropriate uses.

The W-8 BEN Form

This is one of the most common types of W-8 forms. The W-8BEN or the "Certificate Of Foreign Status Of Beneficial Owner For United States Tax Withholding & Reporting."

The purpose of this type of W-8 form is to identify an individual payee's foreign status, and it applies to both independent contractors and international employees.

Filing Form W-8BEN does not exempt foreign employees from their US income tax liabilities. Every US-based employer is generally responsible for withholding the taxes for W-8 BEN foreign employees. The typical tax rate for foreign employees is the standard 30%; however, the rate varies based on factors such as the country of residence and whether the US has a tax treaty with that country. Foreign employees seeking an exemption or reduced tax status must complete an alternative Form W-8.

Your US business is not required to withhold taxes from the foreign independent contractors if you collect the appropriate documentation. The W-8 BEN confirms that the individual is not a citizen of the United States and is not working within the US. If both are applicable, the contractors are not obligated to pay taxes to the US government (of course, they are responsible for paying the taxes in their own country as required).

Just ensure that if you fail to complete Form W-8BEN for an independent foreign contractor, then you must still withhold 30% of your payments to them for taxes.

W-8 BEN-E Form

Another type of W-8 form is BEN-E, also known as the "Certificate of Foreign Statutes for Beneficial Owner for United States Tax Withholding & Reporting". This form determines whether an entity, such as a corporation, partnership, or estate, is a foreign entity for tax purposes.

Form BEN-E is quite appropriate for the foreign entities profiting from your businesses in the form of interest, dividends, royalty payments, rents, annuities, etc., or for those claiming a reduction or exemption based on a treaty status.

So, will the entity pay the taxes on these US earnings? Quite possible. Under US tax law, you may be obligated to withhold 30% of the income tax when paying foreign entities.

W-8 ECI Form

The next type of form is for effectively connected income (ECI), also known as the "Certificate of Foreign Person's Claim of Exemption From Withholding On Income Effectively Connected With The Conduct Of A Trade Or A Business In The United States".

That is a mouthful.

The ECI form identifies the payee who received payments from a US-based company as the recipient of payments resulting from engaging in a business or trade with them.

So, what is the difference between foreign payees (BEN-E) and effectively connected income?

W-8BEN-E is typically for passive income (e.g., investment dividends, royalty payments), whereas W-8ECI is for active business income.

W-8ECI has a more performative US business presence than W-8BEN-E, and, as such, income on W-8ECI is generally not subject to withholding (the business is already taxed like a United States Business).

W-8EXP Form

There are different types of foreign organizations that use Form W-8EXP, the "Certificate of Foreign Government or Other Foreign Organization for United States Taxes Withholding & Reporting".

This form generally helps determine the tax-exempt status of foreign entities, such as government agencies, NPO (not-for-profit) organizations, and foundations. Just as NPOs are exempt from taxes in the US, the same rules apply to foreign organizations with tax-exempt status.

The type of W-8 form helps identify a foreign payee with tax-exempt status who is not subject to income tax on payments your company makes to them.

W-8 IMY

The final type of W-8 form is the IMY or "Certificate of Foreign Intermediary. Foreign Fliw-Through Entity, or Certain US Branches For United States Tax Withholding & Reporting."

The form helps determine the foreign entities that receive payments on behalf of someone else.

For instance, a partnership in which each partner is required to file income taxes on their individual returns serves as a flow-through of information, with the partners obligated to report income to the IRS.

Similarly, a payroll processor acting on behalf of another company and distributing payments to foreign employees in another country is also an example of a flow-through payee. Your company pays the payroll provider, and the provider then distributes payments to the designated payees.

It is like chain-of-custody reporting for the IRS, so they can follow the money trail.

When & How To Collect The Right Tax Documents

Regardless of whether you are negotiating with a US citizen or a foreign individual, employee, contractor, or vendor, the same advice applies to all: "Collect and document tax status before any money changes hands".

Getting a complete and correct W-9 or W-8 form should be part of your onboarding process.

1: Verify The Citizenship Status

If your employee, contractor, or vendor is a US citizen or legal resident, use Form W-9 and withhold income taxes computed on a graduated basis. If they are a non-resident or a resident living in another country, use the appropriate W-8 form for their situation.

2: Choose The Right Form W-8

For a foreign individual earning income from a US-based company, you will need to ask a few more questions. For examples:

• How is each individual worker classified (independent contractor vs employee)
• What country is the individual or entity located in?
• Does this country have a tax treaty with the US that lowers the tax rates below the standard 30% of the gross income?
• Is this entity the end recipient, or a pass-through entity, such as a payroll processor?

Asking this question will help you choose the right type of W-8 form.

For independent contractors and employees who earn wages or salaries, use Form W-8 BEN.

Review And Validate

Before issuing any payment, review all the tax forms for their accuracy and completeness. Verify that the employee, vendor, or contractor provided information that matches your records. Enter your W-8 or W-9 forms into your payroll accounting software and ensure that the applicable withholding rates are set.

With this being done, you are now ready to get to work. Your new contractor, vendor, or employee can begin working and earning income for your company, and you can pay them while staying compliant with the IRS.

4: Don't Skip The Record Maintenance

The W-8 forms are valid for three years. They will expire on December 31 of the third year. For this, you will need a process to identify and document any tax forms related to any relationship with a vendor, employee, or contractor that lasts more than three years.

The Bottom Line

Both W-8 and W-9 forms document how a recipient of the income from a US-based company is taxed. The only difference is that the W-8 form is for foreign individuals, and the W-9 is for US citizens or legal residents.

You shall collect either a Form W-8 or a Form W-9 from every individual or entity to whom your company issues payments. Further, you must have a procedure to collect and document all of this information before the money changes hands.

You can seek professional assistance from the right payroll provider or a CPA, who can simplify the process and ensure 100% compliance with local tax regulations. Savetaxs, has a team of expert CPAs helping NRIs remain compliant in foreign countries. Connect with us as we serve our clients 24/7 across all time zones.