Difference between w8 and w9 forms
Last update: July 25th 2023
Knowing the difference between w8 and w9 forms can make a big distinction among successfully collaborating with the IRS and incurring taxes or penalties for non-compliance. Especially, if you run a US-based firm that employs independent contractors. In order to record income that goes to their suppliers, businesses that exist in the United States must have appropriate tax ID information. Companies with activities in the US, whether they are US-based or not, are subject to this data collection process.
In this article, we will be talking about the difference between w8 and w9 forms in the USA. To comply with US federal tax law requirements and prevent penalties for noncompliance, it is crucial to retain precise W-series tax ID data for the suppliers. You will be in a better position to make the most of your freelancing workforce while maintaining compliance once you've sorted out all of that.
Introduction to w8 & w9 forms
Foreign individuals and businesses expressly use the W-8 form in order to avoid having to fill out forms for specific tax withholdings. This document serves as confirmation that the corporation is legally operating in the US even though its headquarters are overseas.
Simply defined, US firms need these documents to calculate the volume of tax they should withhold from international suppliers. This process is complicated by the various tax treaties the US has with other nations, such as an agreement on double taxation with the UK.
The W-8 series of five separate forms, which can be utilized to control tax needs for firms claiming international tax ID status, adds to the complexity. According to who is filling out the form and why will determine how they differ in purpose. They are complicated because suppliers hardly know which form they need to fill out, which is why.
W-9 forms are used to give a corporation's federal Taxpayer Identification Number (TIN) to an organization that provides taxable payments to that company, in contrast to the complicated W-8 forms. The W-9 tax document only needs to be used by businesses or associations that were founded, organized, and principally operate in the US and are subject to US regulations.
The information on W-9 forms is crucial because it enables the paying company to identify the kind of entity they pay using details like a location and TIN. The Internal Revenue Service (IRS) typically uses W-9 forms to verify that the income reported by the receivers matches the payments reported by the receiving business. Therefore, it is crucial for businesses to effectively communicate correct data to their suppliers.
Purpose & Usage of w-8 form
Certain foreign individuals and corporations can request an exemption from having taxes withheld from income generated or derived in the USA by submitting Form W-8.
Irrespective of whether the person receiving the income is a citizen of the USA, tax withholding is necessary for the majority of income made in the country. On behalf of the payee, the payer subsequently sends this tax funds to the federal government.
Regular or determinable yearly or periodic (FDAP) revenue, such as dividends, interest, fees, rental payments, grants, or even scholarships, may also be subject to withholding requirements. The employee determines whether a W-8 form needs to be withholding by the payer (employer), not the kind of income.
There may be a tax agreement in existence between the United States and the nonresident's place of origin that states that income generated in the United States by nonresidents is not liable for withholding.
This withholding requirement is waived for individuals who are not nationals of the USA by filing a w8 form to the paying entity, the employer. Without the tax agreement, nonresidents may otherwise be subject to tax in both nations on the same income they earned in the USA.
People, trusts, businesses, or other kinds of businesses can act as withholding agents. Any payee they have cause to suspect is an international individual or business must provide a Form W-8 to be exempt from tax withholding.
Form W-8 submission could result in a complete withholding exemption or a reduction in the amount that must be withheld. If you want to decrease or eliminate withholding, you, as the payee, have to complete the extra step of seeking an exemption on the relevant Form W-8. Payments should not be issued until your Form W-8 is on file with the withholding agent.
Types of w8 forms
Five various kinds of Form W-8 exist. The best option will depend on the payee's identity, the withholding agent's identity, and the basis for the claim of a withholding exemption.
· Form W-8BEN: The most popular variation of the W-8 form is W-8BEN. People who seek to be excluded from tax withholding or claim benefits under a tax treaty use it to do so. To claim treaty benefits, you must fill out Part II of the application. A legitimate Social Security number or personal taxpayer identification code with the US government is necessary for the payee.
· Form W-8BEN-E: The W8-BEN and W-8BEN-E forms are basically equivalent. However, it happens when the recipient of the payment is a company or trust instead of to an individual.
· Form W-8ECI: When the income is the result of operating a business or trade within the United States, Form W-8ECI is in use. Line 11 should contain a description of the sort of income.
· Form W-8EXP: Payees that are governments abroad, international private organizations, or international central banks utilize the form W-8EXP. The IRS has determined that they are tax-exempt. With the ECI and BEN forms, there is some overlap in this area. This one is only to be used for exemptions requested in accordance with specified provisions of the Internal Revenue Code, specifically Sections:
o 115(2)
o 501(c)
o 892
o 895
o 1443(b)
· Form W-8IMY: Foreign withholding agents, also known as intermediaries collecting payment in the name of an exempt payee, partnerships or other types of flow-through businesses, or foreign trusts, use the Form W-8IMY.
Key information required in w8 forms
The primary data necessary is the name of the person or firm, the address, and the TINs, albeit the forms differ.
On Form W-8, the payee typically needs to provide a current U.S. taxpayer identification number. The withholding agent must check the number against the IRS's databases.
When the year is through, withholding agents do not need to send Form 1099s to payees who have completed any Form W-8. Form 1042-S may be necessary instead for payments made to people or businesses outside of the United States. This form lists every payment made to people or organizations throughout the course of the tax year. One also needs to be given to the IRS for each payee.
Purpose & usage of W9 form
A W-9 serves to obtain tax information from a supplier. A business needs to file a return of data when it pays a non-employee or another entity more than $600 for their services in a calendar year. The goal of a W-9 is to obtain the necessary information straight from the supplier in order to guarantee that the information given is accurate.
Even though some information is accessible to the general public, Form W-9 safeguards the company requesting the information by asking the other side to sign the form. The signature attests that:
· The provided tax identity number (TIN) is accurate.
· Backup withholding is not applicable to the other party.
· The opposing party argues that they are exempt from backup withholding.
· The vendor's FATCA code (as well as the status of the vendor's exemption).
Businesses fill out the information return using the name, address, Social Security number, or tax identity number suppliers supply on Form W-9. The IRS should not receive copies from either the sender or the recipient. The company requesting the tax data must also keep copies of the form in a secure location.
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The IRS receives a variety of informational returns that originate from the Form W-9. The most typical scenario occurs after an independent contractor finishes work for a business and receives payment. The independent contractor must receive a Form 1099-MISC and report data their taxes if they receive more than $600 in a single year.
A Form W-9 serves in more situations than just this one. To properly report Forms 1099-INT, 1099-DIV, or 1099-B, a bank or credit union depends on receiving taxpayer information. A Form W-9 may also be necessary from a taxpayer in order to cancel loans, education loans, or property deals.
Information required in w9 forms
Independent contractors must provide the following eight parts of information on Form W-9:
· Name: This name will appear on the taxpayer's tax return. This field must be fully completely. Although it may also be the name of an entity or a lone proprietor, this area is usually the name of an individual. The name of the partnership or other company may also be set by the taxpayer.
· Other company name: Only if the taxpayer uses a company name, trading name, DBA title, or disregarding entity name is this line necessary.
· Federal tax classification: The taxpayer must indicate their legal status as a corporation, an individual, a sole proprietor, an LLC with only one member, a limited liability company, a partnership, a trust, or an estate. The taxpayer just needs to choose one of the available options.
· Exemptions: The taxpayer must decide if they are free from FATCA reporting or backup withholding.
· Address: The taxpayer must enter their address, city, state, and ZIP code.
· Account numbers: If the requester requests it, the taxpayer might add more details in this option box. A bank or brokerage company, for instance, might request that the client provide their client data here.
· Tax identity number: The basic goal of a W-9 is to collect the taxpayer's tax identification number. This could be an employee identity number or a social security number.
The taxpayer must endorse the form at Part II (Certification) after filling out the aforementioned information. Form w9 for international contractors must be properly guarded by the person completing it out and the business receiving the final version before delivery. Also, after receipt to prevent identity theft because it asks for a tax identification or social security number.
Key Differences between w8 & w9 forms
Understanding difference between w9 and w8 is crucial when dealing with an independent contractor taxes so that you are aware of which one to complete. Here is an in-depth examination of the w8/w9 forms for tax:
· US employees who have an SSN or TIN must complete Form W-9, but foreigners and non-resident foreigners who get earnings from US sources must complete Form W-8.
· While there is just a single W-9 form, there are five separate W-8 forms. Depending on the kind of revenue they receive, freelancers and vendors should fill out a different type of W-8.
· The IRS uses the W-8 forms to calculate the appropriate tax withholding rate and to maintain track of how much money is transmitted to people and organizations in other countries.
· The W-9 form's objective is to confirm that Americans who are self-employed are paying the appropriate amount of tax.
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Applicability based on tax residency and status
Generally speaking, a W-9 must be completed by someone who will be paid as a non-employee. Form W-9 may be necessary for an array of scenarios. For instance, some forms of Form 1099 must be provided to taxpayers who will be collecting interest, receiving proceeds from a sale of property, paying home mortgage interest, paying educational loan interest, or having debt forgiven. An opposing side may ask for your financial data via Form W-9 in order to appropriately submit the tax form.
Form W-9 is a type of IRS tax document that asks for details on a person who is either a citizen of the United States or who is a resident alien. The data serves a purpose for contractors, freelancers, or unaffiliated suppliers; it is not used for employees when filling out Form 1099. Penalties may apply if the form is not completed.
Foreigners who receive money through companies in the US must utilize Form W-8BEN. Form W-8BEN is only filed by non-U.S. citizens, not by Americans. Additionally, W-8BEN-E is only for people; entities must use another form.
The five different IRS W-8 forms are available. These forms are utilized by people or organizations from other countries. The taxpayer or withholding operator should get the forms, not the IRS. The primary data requested is the name of the person or firm, the address, and the TINs, albeit the forms differ.
Reporting and compliance considerations
w9/w8 form serve in various situations and each one has a specific function. In order to achieve correct tax reporting and compliance, it is critical to comprehend which form is right for your circumstances. Here is what you should know about compliance regarding w8 form vs w9:
W8 forms:
· For non-US taxpayers.
· Certifies foreign status.
· Necessary to report for tax benefits.
W9 forms:
· For US taxpayers.
· Provides TIN.
· Report IRS income.
Those are the main reporting and compliance difference between w-8 and w-9.
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Also, there is another w8 w9 difference. A 24% tax withholding will be deducted from any subsequent payments you get from your customer if you decide not to provide a Form W-9 or in the event the data given is false. There are additional fees and expenses for willfully omitting to give proper information or misuse TINs. On the other hand, with the w8 form, 30% of net payments sourced from the United States will be withheld as penalties for noncompliance.
Conclusion
The various tax forms and accompanying obligations may seem daunting and complex. But handling them becomes easier by dissecting it part by part and knowing what the forms really stand for.
Your business will be more ready to operate with independent contractors in the US and other countries if you have more information regarding the numerous tax documents you'll need to deal with.
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