I have a tax question: W-8BEN

[Eric]

Alright, so here's the backstory.  My full time job is as the webmaster for a University.  We're going through a website overhaul this summer, and hired a designer through 99designs.com.  99designs allowed us to host a design contest for the work that we needed done, a flat fee for the contest is paid up front to 99designs, and once both parties (designer and client) are happy with the work, 99desings takes their cut and sends the rest to the designer.

Now, we have additional work for the designer, and he says he accepts PayPal.  We can't just sign up for a PayPal account with a Purchasing Card, though, we have to jump through some hoops to add this guy as a vendor to our system, and make him sign contracts and forms and whatever.  Oh, and I forgot to mention one relevant detail, the designer resides in South Africa.

So, I'm told that the first step is to send this guy a W-8BEN for him to fill out.  He does a little looking around and comes across the following page and reads that he'll be on the hook for 30%
http://blogs.angloinfo.com/us-tax/2012/12/24/what-is-form-w-8ben-and-what-is-it-used-for/

That's a large chunk.  Am I missing anything?

EDIT: My understanding, for what it's worth (hint: not much at all) is that since he is not, nor ever has been to the United States, he fails the Substantial Presence Test, and therefore has no tax liability to the US.  http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Nonresident-Aliens

Am I wrong?  I have no idea what the deal is with that 30% flat figure is for or when it comes into play, but I'd be interested in knowing.  

Edited July 13, 2015 by Eric

[kcjenkins]

From the IRS : 

Some types of income that are subject to withholding when paid to non-US persons, if the payments are from US sources:  Certain kinds of Interest (including certain original issue discount / OID); Dividends; Rents; Royalties; Premiums; Annuities; Compensation for, or in expectation of, services performed; Substitute payments in a securities lending transaction; or Other fixed or determinable annual or periodical gains, profits, or income.

Now, as you say, when he files a return, you are correct, and he should, based on your facts, not owe a tax, and thus get the 30% refunded.  But the University has to withhold it, because they have no idea whether, when he files, he may have or not have, a tax liability.  

[Eric]

That strikes me as odd.  When I do contract work, I'll fill out a w-9 and they don't withhold anything.  They'll send me a 1099 at the end of the year, and I pay taxes on the income then. 

Can you link to what you quoted from?  I was really hoping that the purpose of the W-8BEN was to document whether withholding is necessary.  I say that, because I'm being told that they're cutting a check for the full amount, and it's up to the contractor to report the income.

[kcjenkins]

Eric, that quote was from the instructions for the Form W-8BEN   http://www.irs.gov/pub/irs-pdf/iw8ben.pdf

Basically, if you read the bottom of the form [the Certification section] it is saying that the person signing it is certifying that they are not subject to US taxes, thus allowing the payer to not withhold.  So if they filed it, the university should be OK.

[Eric]

Thanks KC!

[kcjenkins]

I just have to say that form, and it's instructions, are really some of the worst examples of IRS forms that confuse more than enlighten.  

[easytax]

Eric, that quote was from the instructions for the Form W-8BEN   http://www.irs.gov/pub/irs-pdf/iw8ben.pdf

Basically, if you read thew bottom of the form [the Certification section] it is saying that the person signing it is certifying that they are not subject to US taxes, thus allowing the payer to not withhold.  So if they filed it, the university should be OK.

KC,

I am asking this as I would like to understand and probably will never have a need to use --- but would still like to fully understand and pars of your reply seem to go along with instructions while the last part seems contrary to a previous part, so clarification would be appreciated.

      Thanks in advance (again - you always have good guidance -- Thank You)!

My question is that should the out-of-USA person NOT file a tax return (which they probably will not) and the IRS want to be persnickety; could the IRS not bill the university (in this case) for the tax due?

The out-of-USA person is liable for USA tax (as I read the instructions) unless their country has a treaty, etc. and the tax is exempt or lower under that treaty. Yes, the W-8BEN allows either a lower rate or if the US Entity wants to gamble, a complete zero withholding BUT with the US Entity expecting the tax to be paid or filed, etc.   If it is not, then the US Entity is on-the-hook so to speak.

In Eric's case the W-9 is sufficient as the IRS knows where he is, etc. (thank you NSA) and could get to him rather easily should they desire -- it is another matter with someone NOT in the USA (either physically or by any business, other than transmitting information and ideas, etc.). The instructions do state (as you posted earlier --- Compensation for, or in expectation of, services performed; Substitute payments in a securities lending transaction; or Other fixed or determinable annual or periodical gains, profits, or income. --- and the out-of-USA person is rendering services and receiving compensation for those services from a USA based entity.

[Eric]

For the sake of discussion, here's an additional page that I came across this morning.  But I never know whether to trust the information.

http://judismithlaw.com/overseas-freelancer-w8ben-or-w8eci/

[easytax]

For the sake of discussion, here's an additional page that I came across this morning.  But I never know whether to trust the information.

http://judismithlaw.com/overseas-freelancer-w8ben-or-w8eci/

Eric, Thanks that helped a lot.

The chart in your article has apparently been taken from IRS Pub-519 and seems correct. By my reading in this circumstance, everything "hangs" on "SOURCE INCOME". Basically since your person was not ever in US and did all work at his place, etc. the income was NOT US Source income and can be deemed untaxable to the vendor. All that seems needed is the protection of the completed W-8BEN as KC stated above.

Appreciate your finding the article. Should the Source Income have been from US, then your university might have been on-the-hook for the tax if not paid but by (my reading) since it is NOT US SOURCE income, then they will not have any tax liability (in this case) and your off shore vendor will not need to file, etc.

 

[kcjenkins]

Yes, Easy, that's how I read it, (after, of course,  and researching several terms in those instructions).  As that second article summed it up [for those who don't click links] 

"So getting back to that freelancer who performs their services overseas, the determining factor is that their income is not US Sourced. Their income is not Foreign Sourced because the source of the income for personal services is the location where the services are performed. We know that only US Sourced income can be effectively connected. Since the freelancer’s income is not US Sourced, it cannot be effectively connected. Therefore a W-8BEN is the right document for a freelancer performing services overseas."