We all are aware of providing form W-9 and form 1099 when paying for items such as services or rental income.
As some of you may have found, some of the payees may not be US taxpayers and are ineligible from filing form W-9.
Below is a summary of the forms that are required in such instances:
W-8BEN- This form must be completed by all non US persons you remit funds to. They must complete, sign and return to you for your records only. You do not submit this to the IRS.
W-8ECI-Generally speaking, payments made to non US residents for items such as rents and services require 30% withholding tax. Income tax treaties will often reduce this rate. For example, under the income tax treaty with Canada, rental payments to Canadian tax residents would require a 10% withholding.
If your clients would like to be exempt from the withholding tax, they need to file an annual US non-resident return and make an election to treat the rental payments as effectively connected income. If they accept these terms, they can complete Form W-8ECI and return to you. This form does not need to be filed with the IRS; however, an ITIN is required in order for the form to be valid. (ITINs can be obtained when the first nonresident income tax return is filed. A form W-7 is attached to this nonresident return, and the form requests an ITIN be assigned to the nonresident taxpayer)
The W-8ECI forms are valid for three years (unless their circumstances change) and should be kept on file.
To enforce the system of withholding, the Internal Revenue Code defines a “withholding agent” to be any person in whatever capacity (including lessees and managers of U.S. real property) having the control, receipt, custody, disposal or payment of income that is subject to withholding. Thus, a real property manager who collects rent on behalf of a foreign owner of real property is clearly considered a withholding agent. A withholding agent is personally and primarily liable for any tax that must be withheld. The liability of the withholding agent includes amounts that should have been paid plus interest, penalties and, where applicable, criminal sanctions.
More detailed information along with these forms can be found on the IRS’s website, www.irs.gov.
By Debra Callicutt, CPA