As a business owner, knowing which tax forms you need to complete or to collect from your employees can be tricky--especially if your background is something other than accounting. But, staying on the right side of the IRS is an essential part of running a business well.
Understanding the distinctions between Forms W-8, W-9, and W-8BEN (which all document employee statuses so you know who is exempt from withholding) can mean the difference between breezing through tax season and finding yourself in the weeds.
Each form is a self-certification tool that documents your employees' statuses--either as US residents or non-resident aliens--so that tax is withheld appropriately. Make a mistake and you might find yourself without proper documentation when the IRS comes calling, or your employees will have too much withheld from their paychecks.
Let's start with the one we've all heard of. Formally known as the Request for Taxpayer Identification Number and Certification, the W-9 is the form used by all US individuals and US-incorporated entities--basically, anyone considered a US resident for tax purposes. So, you'll need a W-9 to request the taxpayer identification number for any US person (including resident aliens) and also to obtain specific certifications and exemption claims. This is how you, as the employer, report on what you paid to the employee.
The W-8 comes in many forms--literally. There's Form W-8BEN, W-8BEN-E, W-8ECI, W-8EXP, and W-8IMY. But don't worry, you can run your business without a degree in accounting as long as you keep the following information in mind.
These forms are exclusively for non-resident aliens who receive US-sourced income. The IRS definition of income includes both active and passive income, so whether your employees work in the US or just receive a pension, one version of the W-8 forms will be appropriate.
The original W-8 is known as the Certificate of Foreign Status. This form certifies your employee as a non-resident alien individual, foreign entity, or exempt foreign person.
In certain circumstances, you may find yourself needing to use one of the many W-8 form variations. One of the most common is the W-8BEN, which 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.
Next, the W-8BEN-E is just like the form above but specifically used for entities rather than individuals. This includes private foundations, corporations, complex trusts, disregarded entities, partnerships, and more.
The W-8ECI is officially known as Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. That's a mouthful, but what does it mean? It's used for entities involved in trade that has US-based income, to exempt them from the typical 30% withholding on US-based income.
Some of the lesser known W-8s will come into play, too, depending on your company's employees. W-8EXP is for international organizations, foreign governments, and foreign tax-exempt organizations to claim an exemption from the Foreign Account Tax Compliance Act (FATCA). W-8IMY is for any entity that is treated as a qualified or non-qualified intermediary of flow-through and established chapter 4 status.
Lastly, Form W-8CE is the notice of expatriation and waiver of treaty benefits, which means the employee is subject to unique tax regulations. All covered expats should complete this form.
Those are the most common forms you'll be using for your employee's tax statuses. The correct use of these tax forms will help tax day go a lot smoother for your company--and your employees.