Arts and culture organizations often work with a diverse range of independent contractors and vendors, both domestically and internationally. Whether an organization is hosting an exhibit from an internationally renowned artist or working with a local professional services firm, they are required to collect W-8 and W-9 tax forms from new partners.
These forms play an important role in ensuring that organizations fulfill their withholding and reporting requirements when paying contractors and vendors. In this overview, we explore the nuances of Forms W-8 and W-9 for arts and culture organizations, walking through best practices for collecting these forms and exploring some of the international tax considerations that organizations should be aware of.
W-8 and W-9 forms ensure organizations have the required information to report income and withhold the right amount of tax from contractors that they work with, both domestically and internationally. Each of the forms serves a different purpose.
The W-8 series of forms are used to obtain information from non-US persons, otherwise known as foreign individuals and organizations, to determine whether these persons are subject to US tax withholdings.
Typically, all US sourced income earned by a nonresident is subject to withholding, at a default rate of 30%. The rate may be reduced by a tax treaty if there is one in place between the vendor’s country and the US. The role of the W-8 series of forms is to determine what income should be reported and the amount of taxes that should be withheld, if any.
There are several different types of Form W-8:
Other forms include the W-8 EXP, which applies to foreign government organizations, and the W-8 IMY, which applies to foreign intermediaries such as banks or financial institutions. It is less common for arts and culture organizations to encounter these forms.
Form W-9 is similar to Form W-8, with the major distinction being that a W-9 should be furnished to US persons and businesses. These forms report information that helps arts and culture organizations determine whether the contractor or vendor should receive a Form 1099.
Typically, taxes are not withheld when an individual or organization submits a W-9. Instead, the W-9 serves as something of a matching system that helps the IRS verify the income that an organization paid to a US taxpayer. Withholding is only required if the supplied tax ID number is invalid.
Organizations do not have to vet the information that contractors and vendors supply on a W-8 or W-9: they can take it on good faith. There is no expectation that the organization verifies the information provided, but there are several best practices that arts and culture institutions should be aware of.
Requests for W-8 and W-9 forms should be made before the first payment is made to the vendor. This ensures any withholding requirements are proactively identified before payments are made.
A W-8 or W-9 only has to be submitted once, although an organization should request it again if something material has changed since the original submission or once the form expires. Filings should be retained for at least three years after any applicable payroll or withholding tax returns, in accordance with your organization’s document retention policies. An updated form should be requested if additional payments are to be made after the three year period for which the forms remain valid.
Neither Form W-8 nor W-9 is submitted to the IRS directly. Rather, they are used to identify whether there are any withholding requirements that the organization must fulfill. If withholding requirements do exist, then the organization must withhold the correct amount, make regular withholding tax deposits, and submit the correct tax filings each year to ensure contractors and vendors are given credit for the withheld taxes.
As the withholding agent, it is the responsibility of your organization to withhold these taxes. If you fail to withhold taxes when you should have, you could be required to pay these taxes, plus any applicable interest and penalties, in the event of an IRS audit.
Form W-9 is important in determining whether a contractor or vendor should receive a Form 1099. If the contractor reports that they are a Corporation or an LLC with a C or S tax classification, they generally do not need a Form 1099, except attorneys, who should always receive a Form 1099 regardless of entity structure. For individual contractors, any payments over $600 in a calendar year would trigger a Form 1099 requirement, although tax withholding is only required if the contractor’s tax ID is invalid.
If an organization is not in compliance with Form 1099 filing requirements, the IRS may impose significant penalties. Penalties are assessed based on the number of forms that an organization failed to file and the amount of time that has passed since the due date. If your organization has not made the required filings, consult a tax advisor.
When requesting a Form W-8 or W-9, there are two key distinctions that an organization needs to make as it pertains to international tax:
Determining the answers to these questions is typically a relatively time-sensitive issue. It’s often the case that your organization has chosen to hire a non-US individual or organization and would like to pay them a deposit for their work. Before this payment is made, you need to clarify a couple of key issues.
If the income is US-sourced i.e. the service will be performed in the US, your organization may have to withhold a portion of this income. The default is to withhold 30%, but many countries have tax treaties with the US that lower or eliminate this withholding requirement. A full table of tax treaties is available on the IRS website. It is the responsibility of the recipient to tell you whether you should be withholding less because of a treaty benefit.
Complications arise when income is split between the non-US person’s home country and the US. This occurs in scenarios where an artist creates an exhibit in their home country and then travels to the US to install it. Determining what percentage of income is US sourced vs. non-US sourced can be a complex issue, and organizations may wish to consult their tax advisor.
The payment to a foreign person may be subject to reporting on a Form 1042-S, Foreign Person’s US Source Income Subject to Withholding and Form 1042, Annual
Withholding Tax Return for US Source Income of Foreign Persons. A copy of the 1042-S is provided to the recipient of the income and must be filed with the IRS by March 15th in the year following the payment. Form 1042 is required to be filed when there is a 1042-S filing requirement and is also due March 15th in the year following the payment.
Understanding your organization’s obligations regarding W-8 and W-9 forms is an important matter for arts and culture organizations. In many instances, the process can be relatively straightforward. However, when working with non-US individuals or organizations, this matter can grow far more complex.
If you need guidance navigating these issues, Smith + Howard is here to help. Our nonprofit accounting professionals have significant experience advising a diverse range of arts and culture organizations and also bring in-depth knowledge of international tax considerations.
To learn more, contact a Smith + Howard advisor today.
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