When you start a business, you’ll need to know all the necessary tax documents that allow you to operate legally and ensure you abide by the regulations. Staying on top of these documents will ensure that you submit everything correctly, on time, and avoid penalties. A document you may need to know about is the W-8BEN-E form. This crucial document allows businesses operating out of the United States to claim tax exemption on income from that country.
The document is officially known as the Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities). U.S. tax regulations state that any company paying a foreign corporation that is conducting business within the country must withhold a mandatory amount of 30 percent for tax. However, if the foreign company is located in a country that has a tax treaty with the U.S., they can fill out and submit the W-8BEN-E form to be exempted from the 30 percent tax.
What is the Difference Between a W-8BEN-E Form and a W-8BEN Form?
The forms differ in one distinct way: the W-8BEN form is for foreign, non-US sole proprietors, whereas the W-8BEN-E form is for non-US organizations or entities like businesses or corporations. The W-8BEN document certifies that the individual or sole proprietor is a foreign person who must pay a 30 percent tax rate on domestic income earned by foreign businesses and that they are a non-resident alien or NRA.
The two forms ask for almost identical information, although the W-8BEN-E form is longer and requires a more detailed description of the foreign entity.
Why is the W-8BEN-E Form Necessary?
Many Canadian companies deal with U.S. clients, given similar business processes and cultural understanding. Often, U.S. clients aren’t even aware that the service provider is Canadian. American clients also offer an opportunity for Canadians to earn a bit more money due to the favourable exchange rate, although the income received may be subjected to tax.
Canada has a tax treaty with the U.S. due to strong economic ties and proximity. That means the other country does not tax residents of both countries on the same income within the same year. While U.S. companies often withhold 30 percent tax on income they pay to foreign contractors, the tax treaty means that you won’t get taxed twice on the same income. That’s why filling out the W-8BEN-E form is so important: it allows you to claim exemptions or special withholding rates, preventing you from paying double taxes. The form also contains a declaration that you’ll include the income on your Canadian tax return to make sure you stay compliant.
You don’t have to mail a copy to the IRS since it is filed with the withholding agent. However, you may want to work with business accounting services in Canada to make sure you fill it out correctly. Otherwise, your client may send 30 percent of your payments to the IRS, requiring lengthier processes to try and get it back.
Why is the W-8BEN-E Form Used Instead of a W-9?
A W9 form is only to be completed by U.S. individuals, both citizens or green cardholders. Those who are treated as residents for U.S. tax purposes, like those living and working in the U.S. and entities, must also use the W9 form. Financial institutions ask US individuals to complete the form to acquire personal identifying information to submit income paid to you to the IRS. Since you are a non-US individual, you don’t have to complete this form. Instead, you’ll fill out the W-8BEN-E if you are a corporation or the W-8BEN if you are a sole proprietor.
The W-8BEN-E form helps Canadian entities and corporations serve U.S. clients more conveniently without worrying about being taxed twice on the same income. It also avoids complicated scenarios and helps businesses comply with tax regulations in both countries. By working with bookkeeping services for small businesses, you can fill out the form correctly and stay on top of all tax requirements.
Blueprint Accounting, Inc. is among the best bookkeeping companies in Canada, offering accounting, corporate tax, and bookkeeping services nationwide. Time is your most valuable resource, so let us handle the numbers so you can focus on what you do best: growing your business. Contact us today for a free consultation!