Global hiring is booming, and it’s made possible for companies all over the world to look outside of their talent pool.
However, the process raises the question of taxes, which can be confusing both for employers and employees. Who pays what? One of the crucial questions for employers is - what tax forms do I need to send out to employees and contractors in different situations?
Read on to learn all you need to know about tax obligations when doing work in the US or with US workers.
Tax forms for contractors: general rules
Simply put, only US-based companies need to collect Forms W-8 or W-9. If a company is based outside of the US, there’s no need to collect them. The tax compliance matter still needs to be handled, but it’s going to be according to the laws of the country where the company is located.
When a company is based in the US and hires US citizens, they need to comply with domestic tax regulations and use Form W-9. If a US-based company hires foreign contractors, it’s the employer’s responsibility to issue the Form W-8BEN to independent contractors acting as individuals, or W-8BEN-E forms to those acting as business entities.
In the following sections, we’ll explain these forms more in-depth.
The tax form W-9 is used to collect and verify the necessary information from US-based independent contractors. When tax season approaches, employers issue these forms to their independent workers and keep the completed document in their premises. Note that employers aren’t bound to submit the form to the IRS, but they need to have it.
Form W-9 contains different data about the independent contractor. Other than their name and current address, there’s also the TIN (Tax Identification Number) or Social Security number. This number has nine digits and must be provided in the form to avoid potential penalties from the IRS.
Only independent contractors are required to fill in this form. In case you’re a part-time or full-time employee on a company’s payroll, you will be completing Form W-4. If you’re not sure what your status is, you can talk to your employer, look it up in your contract, or check out this article.
As form W-9 only serves to identify the contractor and get their personal information, another form must be completed to prove to the IRS that an independent worker will pay their taxes. They will use form 1099-NEC to report their income.
Want to read more details about form W-9? Check them out here.
When an employer hires contractors outside of the US, they need different forms to get information from their workers. Forms W-8 are used to collect data from foreign independent contractors, and a business that hires them may need either W-8BEN or W-8BEN forms, depending on how the contractor acts - as an individual or a business entity.
Form W-8 is necessary for all foreign contractors who perform work for US-based employers. If a contractor doesn’t submit a completed form timely or they provide invalid information, they may need to pay the full tax rate on their income, which is 30%. The employer needs to issue the form to the contractor, but is not in obligation to submit it to the IRS.
Form W-8BEN is also called Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting. It proves that a contractor is indeed a non-US person and that they complete their work outside of the States. The other type of W-8 form, Form W-8BEN-E is used when a foreign person acts as a business entity rather than an individual and also gives the contractor a chance to claim a tax reduction.
This tax reduction is possible in both cases (individual contractor or a business entity) if the US has a tax treaty with the country the contractor comes from.
To check what countries have a tax treaty with the US and learn more about tax forms for independent contractors, read this article.