Foreign Workers with Certain U.S. Source Income Have New Withholding Regulations

If you hire foreign contractors or workers to do jobs in the United States, withholding on their payment may be required.  Foreign persons can use the appropriate W-8 form to claim treaty benefits which reduce or prevent withholding. If you have a withholding obligation, you should take note of the final regulations published on January 2, 2020 by the Internal Revenue Service (IRS).

W-8 forms are used by foreign individuals and businesses to verify their country of residence for tax purposes and certify that they qualify for a lower rate of tax withholding. Form W-8  is submitted to the withholding agents, not to the IRS. The form is kept on file in the event of an audit. Forms are generally valid for several years. Failure to submit the appropriate W-8 form will result in withholding at the full rate of 30%.

The new regulations are applicable if you have accepted any W-8 forms from foreign persons who are being paid for services or work performed in the US. The new regulations require W-8 forms to include a foreign Taxpayer Identification Number (foreign TIN) and, in the case of an individual account, the date of birth. A foreign TIN is usually whatever is equivalent to a Social Security number or national identity card number in that person’s country. There are some countries that do not have foreign TINs or have requested their citizens not supply their identification number. The IRS has a list of these countries. If you are working with someone in one of these countries, then an exception statement needs to be attached to the W-8 for it to be considered valid.

All withholding agents should review the W-8s they have on file to determine if they include the new information required. If not, forms signed prior to 12/31/18 will be considered valid if a statement from the foreign person is attached with the missing information. Forms signed after 12/31/18 are no longer valid without the additional information and a new W-8 must be obtained.

If you would like more information or need help, contact Kate Maxwell or anyone on Smith and Howard’s tax team.