No matter your resident or employment status, filing taxes in the United States can be incredibly confusing. The language is complex and often refers to terms most of us have never heard before. On top of that, the pressure of what may happen if you get something wrong can be overwhelming and even paralyzing.
If you’re a non-US citizen and a non-US resident (known as a non-resident alien) who has earned money in the US, taxes can be that much more difficult.
Depending on the type of income you’ve earned, the means by which you’ve earned it, your country of citizenship, and a number of other factors, you’ll be required to fill out one or more tax forms that all fall under the umbrella of a W-8. If you’re a non-resident alien or foreign business who earned money in the US, read on to learn all about your W-8.
What is a W-8 Form?
A W-8 form is a grouping of tax forms specifically for non-resident aliens and foreign businesses who have either worked in or earned income in the US. It declares the applicant’s status as a non-resident alien or foreign national and informs financial companies that they will be taxed differently than a resident. They are only for foreign people and/or entities without citizenship or residency—a US resident or resident alien will never be required to fill out a W-8 tax form.
The law states that foreign individuals or entities who have worked or earned income in the US must pay a 30% tax on some types of income earned. However, it’s not always black and white. The US has a number of Income Tax treaties with foreign countries that allow reductions on taxed amounts. By filling out the W-8 form, foreign individuals or entities are declaring who they are, where they are from, and the various types of income they’ve earned in order to determine how they will be taxed.
W-8 Form Instructions
There are 2 main types of income earned by non-resident aliens and other foreign entities. The first type is called “effectively connected income” or ECI. This is income “earned in the US from the operation of a business in the US or is personal service income earned in the US.” ECI is taxed at the same rate as it would be for a US citizen. This may include:
- Sales income made from purchasing and selling products
- Production income made from items produced in the US for sale outside of the US
- Services income made from services performed in the US by entities outside the US
The second type of income is for fixed or determinable annual or periodic income, known as FDAP. This includes passive income such as interest, dividends, rent, or royalties. It is taxed at 30%, unless a tax treaty specifies otherwise.
There are a few types of income that aren’t subject to tax withholding. This may include:
- Interests, dividends, rent, or royalties earned from foreign sources
- Interest on bank deposits
- Broker proceeds
Remember that regardless of whether income is taxable or not, it must always be reported on the corresponding W-8 form.
There are a few key tips for success when filling out your W-8. The most important is to be careful and precise, and make sure you’re answering each question correctly. Furthermore:
- Read the entire form thoroughly before answering any questions. Ensure that you fulfill all the requirements and are completing the correct form.
- Only fill out the form in black or blue ink.
- Make sure you understand each question thoroughly and are providing the correct answer. Not every section will apply to you—skip it if it doesn’t.
- Provide all the proper certification, including the signatures of all requested parties. They are all agreeing that this information is correct and accurate.
- Submit the form to whoever has requested it, not to the IRS.
W-8 forms are notorious for being “deceptively simple”. Due to the complexity of the W-8 form, many who are required to fill it out work with a professional, such as an income tax preparation service, to do so. The penalty for not filing on time could result in up to a 30% fine.
Different types of IRS Form W-8
Depending on both the entity that has requested the W-8 and the entity who is required to complete it, there are a number of different variations of the W-8 form that you may need to complete.
W-8BEN: This is for individuals to claim foreign status or treaty benefits, or for royalty/passive income (FDAP)
W-8BEN-E: For foreign entities (businesses, etc.) to claim foreign status, treaty benefits, or document chapter 4 status
W-8ECI: To be completed by the payer to confirm that all income listed on the form is connected with a US business or trade (ECI)
W-8EXPL: Used by a variety of foreign entities to claim exemption from tax withholding, including
- Foreign governments
- Foreign tax exempt organizations
- Foreign private foundations
- Government of a US possession
- Foreign central bank of issue
W-8IMY: To be completed by “an intermediary, a withholding foreign partnership, a withholding foreign trust, or flow through entity”
If you’ve identified an issue with your W-8, or perhaps have forgone completion altogether, you’re not totally out of luck—but you’ll need to act quickly. You may be subject to a 30% fine on your taxable amount, along with additional charges. The first thing you need to do is to get in contact with a tax relief services professional. They’ll work with you to assess the damage, come up with a plan to rectify the situation, and communicate with the IRS and other revenue services on your behalf.