Form W- 9 vs Form W – 8 BEN: Key Differences Explained
When dealing with US tax compliance, especially for individuals and businesses, engaging in financial transactions, two important forms play a key role – Form W9 and Form W – 8 BEN.
Both are tax identification documents but cater to varied groups including US persons and foreign individuals for different purposes.
What is Form W-9?
Form W-9 is titled ‘Request for taxpayer identification number and certification’. It is an IRS form used by US citizens or residents to provide Tax identification numbers to financial institutions or businesses that may need to report income paid to them.
Who needs to fill out Form W-9?
Form W-9 is used by-
- Independent Contractors and Freelancers working with the US business.
- Self-employed individuals receiving payments from US companies.
- US citizens or resident aliens receiving taxable income from businesses.
- Business entities operating in the US.
- Financial institutions require verification of an individual’s entity’s tax status.
Why do I need to submit a Form W-9?
- For Reporting Tax: Businesses need a TIN Number to report payments made by them to the IRS.
- For 1099 Forms: If a US resident or citizen earns $ 600 or more as a freelancer, contractor, or vendor, their client must report it using Form 1099 NEC or 1099 MISC.
- Backup withholding prevention: To ensure you are not subject to 24% backup withholding if the IRS requires it.
- Business transactions: It is required by banks, lenders, and financial institutions for verification of accounts.
- Investment Income Reporting: The form is used for reporting dividends, interest, and rental income from US sources.
What is the key information to be included in Form W-9?
When seeking Form W-9 tax identification requirements, consider what important information is to be included in Form W-9-
- Including Name as per IRS records.
- Business name
- Federal tax classification (individual, LLC, Corporation, etc)
- Taxpayer identification number
- Certification of accuracy and exemption from backup withholding.
How to fill out Form W-9 for independent contractors?
- Enter the legal name as it appears on the tax documents.
- If you operate under a different business name, enter it.
- Check the box if federal tax classification applies including individual/sole proprietor, LLC).
- Enter SSN or EIN.
- Leave the area of exemptions blank unless you qualify for it.
- Sign and date the form to confirm accuracy.
- Submit the form to the payer. Send the completed form to the client and not the IRS.
Do I need to fill out a Form W-9 for LLC?
Yes, if the Limited Liability Company is receiving payments from a US client, they must fill out Form W-9. In Line 1, the legal name of LIC needs to be entered. In Line 2, the trade name if applicable needs to be provided. And on Line 3, check the appropriate tax classification.
Single Member LLC: Check Individual/sole proprietor or Single Member LLC if taxed as a disregarded entity.
Multi-Member LLC: Select “Partnership” or “Corporation” based on your tax status. Enter your Employment Identification Number or Social Security Number, sign the form, and submit it to your payer.
How to update Form W-9 for tax changes?
- Obtain a new Form W-9 by downloading the latest version from the IRS website.
- Update name or business name. If your legal name or business entity name has changed, enter new details.
- If there is a change in tax classification. Check the appropriate box- Sole proprietor, LLC, Corporation, etc if your status has changed.
- To update the TIN enter your new SSN and EIN if it has changed.
- Sign and date the form to ensure accuracy before submission.
- Send the form to the requestor. Provide the updated form to your client, employer, or financial institution.
Form W-9 for self-employed individuals
- Enter the legal name. Use the name registered with the IRS.
- If there is a business name, enter it in the Line 2.
- Under Tax classification, check Individual/sole proprietor or single member LLC in Line 3.
- Enter the social security number or Employee identification number.
- Leave the exemptions place blank, unless you qualify for the same.
- Certify the details by signing and adding the date.
- Send the completed form to the client or payer or the IRS.
When is Form W-9 required for payments?
- Freelancers and Independent Contractors: A self-employed individual, freelancer, or independent contractor receiving $ 600 or more annually from a US client, the client will need Form W-9 to issue a Form 1099 –NEC.
- Business payments: If the LIC, partnership, or corporation provides services and receives payments from other businesses, Form W-9 is to be submitted for tax reporting.
- Rental income: If one receives rental income from a property management company, they may request Form W-9 to report the payments made on Form 1099- MISC.
- Financial Institutions: Banks and brokerage firms require Form W-9 for interest, dividends, and other taxable income reported on Form 1099-INT or Form 1099-DIV.
- Real Estate Transactions: If one receives proceeds from the property sale, the Title Company or buyer may request Form W-9 to issue a Form 1099-MISC.
- Backup Withholding: If the IRS notifies a business that it is subject to backup withholding, it must provide Form W-9 to certify taxpayer information.
- Loan Forgiveness: Lenders may request Form W-9 for tax reporting if a portion of your business loan or student loan is forgiven.
- Government Payments: If one receives payments from federal or state agencies, Form W-9 may be required for tax reporting.
- Royalties and Licensing Fees: If one earns royalties, licensing fees, or commissions, the payer may require Form W-9 to issue a Form 1099-MISC.
When is Form W-8 BEN required for payments?
- If a non-US citizen receives income from a US company they must submit Form W-8 BEN to certify their foreign status.
- If the home country has a tax treaty with the US, one can use this form to claim a reduced withholding tax rate on applicable income.
- Without Form W-8 BEN, US businesses must withhold 30% tax on payments to non-US individuals. Submission of this form prevents excessive withholding.
- A foreign freelancer or consultant working remotely for a US client may require this form before making payments to avoid tax complications.
- If one receives dividends, interest, or capital gains from US investments, financial institutions may require Form W-8 BEN to apply the correct tax rate.
- If one receives royalties from US-based companies, this form ensures the tax treaty benefits are applied to reduce withholding tax.
- If one is a foreign investor earning rental income from US properties, this form is required to establish the foreign tax status.
- Non-US students receiving scholarships, fellowships or stipends from US institutions may need to submit this form to determine tax withholding.
- If a foreign affiliate receives commissions or payments from a US parent company, this form is required for compliance.
What is Form W-8 BEN?
Form W-8 BEN is titled ‘Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). This form is used by non-US individuals to certify their foreign status and claim applicable tax treaty benefits on the income received from US sources.
Who needs to fill out Form W-8 BEN?
- Non-resident US residents earn income from US sources.
- Foreign Independent Contractors working for US-based companies.
- Foreign Investors receive dividends, royalties, or interests from US companies.
- Individuals receiving payments subject to US withholding tax e.g. rental income and royalties.
Why Form W-8 BEN is required?
Without the Form W-8 BEN US companies are required to withhold 30% tax on payments made to foreign individuals. However, if there is a tax treaty between the US and the recipient’s home country that allows for a reduced tax rate, Form W-8 BEN helps claim the benefits.
What key information is to be included on Form W-8 BEN?
- Name of the foreign individual
- Country of citizenship
- Taxpayer identification number
- Claim of tax treaty benefits
- Signature certifying non-US status and eligibility for reduced withholding rates.
The gist of key differences between W-9 and Form W-8 BEN
- Form W-9 provides the US taxpayer information for reporting taxable income. Form W-8 BEN certifies foreign status and claims tax treaty benefits to reduce withholding.
- Form W-9 is filled by US citizens, resident aliens, and businesses operating in the US. The Form W-8 BEN is filled by the non-US individuals receiving income from US sources.
- The applicable tax system for Form W-9 is the US federal tax system and for Form W-8 BEN is a foreign tax system with potential tax treaty benefits.
- The tax identification for the Form W-9 requires a social security number or Employer identification number. For Form W-8 BEN the taxpayer identification for W-8 BEN requires a foreign TIN or US individual taxpayer identification number.
- Form W-9 is not subject to withholding tax unless subject to backup withholding. Form W-8 BEN is subject to 30% withholding unless tax treaty benefits apply.
- The most common use cases of Form W-9 are freelancers, contractors, and businesses receiving payments from US clients. For Form W-8 BEN the common use cases are foreign individuals earning US-source income.
- The tax forms associated with the Form W-9 are Form 1099- MISC. Form 1099-NEC and Form 1099-INT. The tax form associated with Form W-8 BEN is Form 1042 -S which reports US income paid to foreign individuals.
- There is no expiration for Form W-9. Form W-8 BEN is valid for three years from the date signed.
When to use Form W-9?
- A US citizen or resident alien working as a freelancer, contractor, or business owner.
- A US-based business entity receiving payments from another US business.
- An individual earning interest or dividends from US financial institutions.
- When one is receiving rental or real estate income from a US Company.
When to use Form W-8 BEN?
- A non-US individual receiving income from US sources.
- A foreign independent contractor or freelancer working for a US company.
- An investor earns dividends, royalties, or interest from US companies.
- Eligible for reduced withholding tax under a tax treaty.
What are the common mistakes for Form W-9?
- Providing incorrect TIN. It is important to ensure that SSN or EIN matches IRS records.
- Not updating the form when the details change. If there is a change in business structure or address, it is important to submit an updated Form W-9.
- Ignoring IRS notification of backup withholding status.
What are the common mistakes for Form W-8 BEN?
- Failing to claim tax treaty benefits. If one is eligible for the claim, they must complete the tax treaty section to reduce withholding.
- Using the wrong form. The foreign business entities must use Form W-8 BEN E and not W-8 BEN.
- Submitting an expired form. This form is valid for three years. It is mandatory to update the form when required.
Understanding the difference between Form W-9 and Form W-8 BEN is important for businesses and individuals dealing with US income reporting. Form W-9 is for US persons and Form W-8 BEN for non–US individuals to certify foreign status and minimize withholding tax obligations.
FAQs
1. What is Form W-9?
Form W-9 is an IRS form titled ‘Request for Taxpayer Identification Number and Certification. It is used by US individuals and businesses to provide their Tax Payer Identification Number to clients, financial institutions, or payers for tax reporting purposes.
2. What is Form W-8 BEN?
Form W-8 BEN is an IRS form titled ‘Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). It is used by non-US individuals to certify their foreign status and claim tax treaty benefits to reduce or eliminate US tax withholding on income received from US sources.
3. What is the difference between Form W-9 and Form W-8 BEN?
Form W-9 is for US individuals and businesses to provide their TIN for tax reporting while Form W-8 BEN is for non-US individuals to certify foreign status and claim tax treaty benefits to minimize US tax withholding.
