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The goals and requirements of Form W-8 ECI are a common cause for confusion in the United States. Failure to submit the right forms or filling them out incorrectly can lead to major issues and tax penalties, which is why US companies engaging contingent workers need to pay close attention to all matters related to the Internal Revenue Service (IRS). Form W-8 ECI and other W-8 forms are essential to help the IRS monitor income directed to non-US citizens, while Form W-9 helps the IRS to ensure that self-employed US citizens are paying the right amounts of taxes.
By understanding the use of each tax form, companies can be better prepared to engage and manage contingent workforces in the US and beyond.
What is Form W-8 ECI?
Form W-8 ECI is officially known as the ‘Certificate of Foreign Person’s Claim that Income Is Effectively Connected with the Conduct of a Trade or Business in the United States’. The form is used by foreign individuals who receive income from US-based companies to establish that they are not US citizens, to claim that they are the beneficial owner of the income at stake, and to claim that the income is connected with the conduct of a trade or business in the US.
Form W-8 ECI is required by management companies since, without it, the US federal law requires employers to withhold 30% of foreign employees’ income and pay it to the IRS. Foreign individuals earning US income are generally subject to US tax rates of 30% although a reduced rate may apply in the case of tax treaties between the US and the person’s country of residence. Effectively connected income is taxed at reduced rates after allowable deductions. This income must be reported on annual US income tax returns. Form W-8 ECI generally remains in effect for a period of three calendar years before it must be renewed.
What are W-8 forms used for?
W-8 forms are used by non-US tax residents to prove their foreign status in order to claim tax treaty benefits. Since the US has different tax treaties with different countries, foreign workers’ tax deductions are not the same across the board. There are five different W-8 forms that are each used to manage tax requirements based on different business types — W-8 BEN, W-8 BEN-E, W-8 ECI, W-8 EXP and W-8IMY.
Non-US independent contractors need to submit their completed W-8 forms to their US employers before the first payment is made to prevent the management company from having to withhold 30% of the income as per US federal tax law that applies to foreign workers. Form W-8 ECI should be completed and submitted during a non-US employee’s onboarding process to ensure full compliance.
How to complete Form W-8 ECI
Individuals completing Form W-8 ECI must insert their country of residence for tax purposes while foreign corporations completing the form must insert their country of incorporation. If the form is being completed for another type of entity, the country under which laws the entity is created, organized or governed must be inserted. The form must be signed and dated by the beneficial owner or authorized representative of the income. It is important to keep copies of the completed and signed forms once submitted to the management company or booking agent.
What is a W-8 BEN form used for?
Form W-8 BEN, ‘Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting’ is completed by a company or an individual to declare that they do not have US residence for tax purposes. This is the most commonly used W-8 form as it helps foreign workers and business owners claim reduction or exemption from US tax withholdings. As mentioned above, the tax treaty between the US and the individual’s country of residence will influence the reduction rate.
What is the difference between Form W-8 and Form W-9?
If your business spends more than $600 on paying freelance workers during a tax year, the IRS needs to be informed of these payments via Form 1099-NEC. Form W-9, ‘Request for Taxpayer Identification Number and Certification’, is used by businesses to gather the necessary information to fill out the 1099-NEC. This information includes the address, social security number and tax identification number from independent contractors and vendors who are US citizens and are therefore required to pay taxes to the IRS. Like W-8 forms, W-9 does not need to be submitted to the IRS.
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