Most of us in America will never need to see or use a W 8 form, but for certain foreigners, it can save them hassle and money.
What's a W 8 form
In a nutshell, a W 8 form is used by foreign businesses and non-resident aliens earning income from U.S. sources. Its purpose is mainly to let brokers and mutual fund companies know that the person or company in question is not subject to the usual tax withholding from investment income.
American citizens generally do not need to use W 8 forms, nor do resident aliens -- instead, they would use the corresponding W-9 form that certifies their tax identification number.
Note that though the W 8 form is an IRS form related to taxes, it's submitted to financial companies that request it from you, not to the IRS. Once submitted, the form will generally remain valid for three years. After that period, the financial entity that requested the form from you might request a new form. If your circumstances change during the three years, you can always submit a new form with your updated information.
Failure to provide a W 8 form when it's required can result in your experiencing a 30% tax withholding, and possibly penalties on top of that.
Variations on the form
There are actually multiple versions of the form. The two main ones are:
- W-8BEN: This is reportedly the most commonly used W 8 form. It's used to certify foreign status in regard to tax withholding on income such as dividends, interest, royalties, rents, and annuities, and permits individuals to claim tax treaty benefits. To receive the benefits of a tax treaty between the U.S. and a foreign country, the filer must provide a tax identification number, and certify that he or she is a resident of the country in question. Foreigners are generally taxed at a 30% rate on income they receive from the U.S., so tax treaties offering reduced taxation are rather welcome.
- W-8ECI: This form certifies that a foreign person's income is tied to work in the U.S. That's in order to exempt it from the 30% tax on income from the U.S. (The "ECI" stands for effectively connected income.")
It's a good idea to consult a tax professional if you think that you need to submit a W 8 form. These forms don't look complicated, but there are many rules related to them, and it's easy to get confused. Just figuring out which W 8 form to use can cause some head scratching.