For freelancers working with US clients: Here is the difference in form W-8 BEN and Form 8233 and why US companies make you file W-8BEN

[tomwedding]

Another night another post.

These forms relate to exemption from withholding of taxes in the USA(read: US version of TDS in India) and the standard rate of withholding is 30%.

Tl;dr: You are required to file form W-8 BEN only and it allows you to avoid withholding in the USA. Plus it is easier to file of the two. However, if you plan to work from USA for a short period of time, you will also have to file Form 8233.

Onto the juicy details:

US treasury requires the company making the payment to a person to withhold taxes. If the company does not withhold, and they do not have the appropriate documentation or support for not withholding (called a withholding certificate) and the the payee owes tax, Treasury holds the company responsible for paying the tax.

The company has two options either to ask you for a W-8BEN or for an 8233 and the difference between both is narrow.

Here is what the W-8BEN says:

Heading:

Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)

Relevant point:

DO NOT use this form if You are a beneficial owner who is receiving compensation for personal services performed in the United States. Use 8233 or W-4 instead.

Now it is important to mention here that we will not discuss form W-4 as that is used by employees(as in on payroll and getting benefits) and not overseas contractors.

Here is what Form 8233 says:

Heading:

Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual

Relevant point:

If you are a nonresident alien individual who is receiving compensation for independent personal services performed in the United States and you want to claim benefit of a tax treaty withholding exemption (Independent personal services, Business profits) for part or all of that compensation then you should use this form.

Now to aid your understanding, we need to clarify a few things first:

Nonresident alien individual: Means an individual who is not a tax resident of USA.

Benefit of a tax treaty withholding exemption: This means benefit of any tax agreement between two countries. Currently there is an agreement(called DTAA ) signed between India and USA and the Article 15 of that agreement covers the freelance services. It provides exemption to Indian freelancers from being taxed int he USA.



Now, on the face of it, it will seem as if you need to file Form 8233 as it specifically covers independent services performed in the United States and talks about the tax treaty benefits.

And I don't blame you for it. This is confusing.

However, if you are someone who has been working with US clients, you would know that they make you file form W-8BEN and not form 8233. AND OBVIOUSLY NOT EVERYONE CAN BE WRONG.

Here is what form 8233 states, that makes it invalid for Indian freelancers:

If you are a nonresident alien individual who is receiving compensation for independent personal services performed

in the

United States.

While this may seem obvious now, I would like the readers to exercise caution as the data and the project you are working in is in fact IN THE United States. Moreover, there can be other interpretations too that may make it seem obvious you are providing services in the United States.

However, the definition followed by IRS will prevail and here is what IRS has to say:

As per Section 862(a)(3) of IRS code; Compensation for labor or personal services performed without the United States shall be treated as Income from sources without the United States.

And as per Section 864(c)(4)(A) of the IRS code; No income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States.

~~

Now it may seem like the use of word without is odd, however, what the IRS code is doing is using it as an antonym of word within. Hence, what they are effectively saying is "Not within the United States".

Analysis: These sections together state the following:

• Compensation for labour and personal services outside the US boundaries will be treated as Income from sources outside the United States AND no income from sources outside the United States shall be treated as Income linked to businesses in the United States.

Hence, the primary condition of Form 8233 that states that this form is to be used for services performed within the United States is defeated as services are performed outside the US boundary AND IRS states that they can not be treated as services linked to a business in the United States.

This leaves us with a basic question as to why even form W-8BEN should be used? If you look at it's heading, it is used to declare that the you as an individual are outside the US boundaries and hence section 862(a)(3) and section 864(c)(4)(A) apply.



That is all for today. Want me to cover any specific topic? Feel free to suggest the same.

 

[egspirit]

@tomwedding Hi, thanks for sharing the above info. I have a doubt. What if I'm a small digital marketing agency working with US clients?

 

[tomwedding]

@egspirit When you say agency, I assume you mean partnership/LLP/ Private limited Company.

For those, you can file form W-8BEN-E
Where “E” at the end is for entities.

 

[egspirit]

@tomwedding Ohk. Thanks you so much!

 

[coplin48]

@tomwedding

Article 15 of that agreement covers the freelance services

Would you say that Article 7 Paragraph 1 covers services provided by entities (LLP), at a 0% withholding rate? Thanks!

 

[carose]

@tomwedding No offence to Original poster, but for anyone who wants a summary of the poster's comment, here it is: If you live in and work in a country that has a tax treaty with the USA, such as Canada or -from what I gather here- India (IRS has a list of tax treaty countries on their website), doing freelance or remote work for a US company that is located in the US, and if you run your freelance work as an individual/sole proprietorship/small business, NOT as a corporation, then you only need to fill out the W-8BEN form, NOT the 8233 form. The 8233 form would only be needed if you did some of the work from within inside the US sometimes throughout the year, such as at the company's offices in the USA. I hope this helps!

To the original poster, notwithstanding, I do appreciate your post since I had a hard time finding the simple facts for this issue. That said, some of your points in the post are a somewhat unnecessary, such as writing in all caps that "obviously not everyone can be wrong" when talking about how some companies only request the W-8BEN. It's unnecessary to write that b/c there is no apparent reason why companies wouldn't prefer to withhold the minimum percent of our earnings unless we jump through hoops to make sure they get all the potentially necessary forms. There's no reason for them to care, so we workers have to make sure.

 

[elthia]

@tomwedding Since US treasury holds company responsible for paying the taxes, does the company ( I believe this is equity holding platform) report the W8-BEN income to India? Or do they rely on individual to report it to India, or any other country that has tax treaty signed w/ US, fir the W8-BEN income?