Knowing the differences between a W-9 and a W-8BEN form are essential to running a great business. It’s also important in order to maintain a proper and error-free tax season.
Businesses most commonly use the IRS W-9 to get information from vendors they hire as independent contractors. When a business pays an independent contractor $600 or more over the course of a tax year, it is required to report these payments to the IRS. Businesses use a 1099-MISC in to do this.
The W-9S ask for four main things:
Business or Business Entity
Tax ID Number (TIN)
Social Security Number (SSN)
The most crucial element about a W-9 is knowing whether or not to fill it out, because the difference between an employee and an independent contractor is substantial.
If you’re an employee, your employer withholds certain taxes on your wages like Social Security and Medicare already. If you’re an independent contractor, you will be responsible for the employer’s share of Social Security and Medicare taxes.
Here’s the thing: if an employer asks you to fill out a W-9, you should hesitate. They might be trying to classify you as an independent contractor to save money – which is misrepresentation. An employee should fill out a W-4, not a W-9.
Know whether or not to fill a W-9 with instructions provided by the IRS.
This form is used by foreign entities, usually non-resident aliens and foreign businesses, to document their statuses. The purpose being to indicate that these entities aren’t subject to standard taxation practices. Basically, it provides foreigners with an exemption from specified U.S. information return reporting and backup withholding regulations.
Even though the W-8 is an IRS form, it is only submitted to financial companies that request it and not to the IRS. Failure to submit the form when asked can result in a 30% tax withholding and may be subject to additional penalties.
There are multiple versions of the W-8 form; the most common are the W-8BEN-E and W-8ECI. The W-8BEN-E certifies foreign status regarding tax withholding on income. This form allows foreigners to claim tax treaty benefits from the U.S. and the foreigner’s home country as long as the filer provides certification of residency in the indicated country and a tax identification number (TIN).
The W-8ECI provides certification that a foreign entity’s individual income is linked to work done in the United States. This certification allows the foreign individual to be exempt from the 30% tax rate on the income they earn.
Follow these instructions on how to file a W-8BEN-E.