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Do you make payments to foreign entities or individuals? Some common examples are foreign contractors, suppliers, vendors, employees who are not US citizens or Green Card holders performing work in the US, and others. If so, you are required to provide Form W-8 to these entities. In essence, this is the foreign equivalent to Form W-9 that most US taxpayers are probably familiar with. However, many US taxpayers miss requesting and maintaining these Forms W-8 as required by the IRS. In October 2021, the IRS made revisions to Forms W-8 that may have significant impact on you and your business.
W-8 forms are completed by foreign individuals or entities that lack US citizenship/residency status but have earned certain types of income in the US. The Form W-8s will report specific information on the foreign individual/entity such as Country of Residence, Taxpayer Identification Number, etc. Once signed, a Form W-8s will generally be valid for the calendar year in which it was signed and the next three calendar years.
Common Example: You outsource some of your IT work to a professional located in Canada. She travels to your Headquarters in South Carolina to do some testing and implementation. Do you have a valid Form W-8BEN on file for her? If not, you should before remitting any payment to her.
The payer (withholding agent) may be required to hold back 30% of the income and remit to the IRS unless a Form W-8 is provided showing a reduced rate (note that other forms such as 1042s, 1099-K, etc. might also be required). The rules around what types of income trigger withholding requirements vary and are quite complex. The penalties for failure to properly report and withhold on US sourced income can be as high as 15%. Additionally, if you do not have these documents on file you must withhold at the highest statutory rate, currently 30%. When looking at the 30% required rate plus 15% potential penalties plus interest, the importance of compliance becomes clear. The IRS has been increasing their scrutiny of these Forms and taxpayers can expect that trend to only continue.
If you are required to collect Forms W-8, then as of May 1st, 2022, you will need to start using the updated Form W-8ECI, W-8BEN-E, and W-8BEN. If you have an old, signed Form W-8 it will still be valid, but you must use the new form once that Form lapses.
If you have questions on this subject or any other foreign withholding or filings, please do not hesitate to reach out to us. Our International Team has the experience and knowledge to help confirm you are in compliance or help you achieve compliance.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change as a result of rapidly evolving legislative developments and government guidance.
