Exemption from Tax Withholding: Do you need an ITIN?

Form w7 exemption from tax withholding

If you sell books through Amazon or CreateSpace, or earn income as a creative indie or authorpreneur through any other US based business, you will need to complete a W-8BEN form if you want to claim an exemption from tax withholding.

Claiming an Exemption from Tax Withholding

US companies making payments to non-resident aliens are required to withhold 30% of your earnings for tax. But the US has tax treaties with many countries that allows companies to pay your royalties in full under tax withholding exemption rules.

First you need to check whether your country has a tax treaty with the US, and if so what percentage of withholding this entitles you to. (In the UK it’s zero, meaning all your royalties will be paid to you and you are then responsible for declaring them on your UK tax return and paying UK tax instead.)

To check this, look at http://www.irs.gov/businesses/international/article/0,,id=96739,00.html, and see if your country is listed.  If it is, find the most recent treaty, and the article number that mentions royalties for literary works. In the UK it’s article 12 (2a).

Of course you can simply allow these companies to withhold your 30% and then file a tax return in the US claiming most of it back. Or you can have the tax paid in the US taken into account on your tax return in your own country. But then you’re just giving Uncle Sam an interest free loan, and royalty payments are slow enough to process as it is. Do you really want to sell a book in April of one year, lose 30% of your royalties to taxes and have to wait until you’ve filed your tax return sometime after April of the following year to be able to claim them back?

No, of course you don’t.

Do you need an ITIN?

If you are an employer, or you’re being paid through a company name, rather than as an individual, you’ll probably need an EIN (Employer Identification Number). If you claim any tax withholding exemptions that require you to file a US tax return you will need an ITIN Individual Tax Identification Number.) If you are resident in the US, you will need either a Social Security number or an ITIN. If your own country doesn’t issue tax identification numbers, or for some reason you don’t have one, you will need an ITIN.

The good news is that if you’re only receiving royalty payments from intellectual property, there’s no need to file a US tax return, so if you receive payments in your own name as a sole trader, you don’t need an ITIN. You can simply enter your tax ID from your own country (in the UK your National Insurance number will do fine.)

You can also get an EIN and use that instead of an ITIN on the form W-8BEN. And while the process to get an ITIN is painful and slow, you can get an EIN with one 10-minute phone call to the IRS. Just call 1-800-829-4933 (the Business and Specialty Tax line.) When I did, the woman confirmed that an EIN was sufficient for royalty income, and I didn’t need an ITIN. If you’re unsure whether you need an ITIN or can use an EIN or your local tax ID, it might be worth making a Skype call to the IRS to clarify your situation.

Completing form W-7

If it turns out you do need an ITIN, download a copy of Form W-7 and fill in the top part of the form by ticking both box “a” and box “h.” On the dotted line next to box h put “Exception 1(d) royalties,” and underneath that, enter your country (in full) and the relevant tax treaty reference, as in the image below:

Form w7

The rest of the form is fairly self-explanatory.  Enter your name on line 1a, and name at birth if different on 1b, your address on line 2, ignore line 3 since you are not resident in the US, enter your date of birth (mm/dd/yyy format as it’s American) your country of birth (in full) and optionally city/state or province of birth on line 4, and tick male or female for box 5.

On line 6a, write your country of citizenship (not residence if different) in full, and enter your tax ID in that country at 6b. You shouldn’t need to enter anything at 6c, again since you are not resident in the US.

At line 6d, if you are sending either your orginal passport or a notarised copy of it, tick Passport, the issuing authority (UK IPS), your passport number and expiry date (remembering to use mm/dd/yyyy format.) If you are using any other form of identification, you have to send two, but you can only enter one on this form. In which case, tick one of the boxes (for example Drivers’ License) and enter the details for that one, then attach a second piece of paper to the form stating which second form of ID you are sending with the same information (issuing authority, ID number and expiry date, which will be none if you’re sending a birth certificate.)

At line 6e either tick ‘no’ if you’ve never had a temporary ID number from the IRS, or if you have, tick ‘yes’ and enter it on line 6f. Then print, sign and date the form, and add your phone number.

Now you need to send the W7, along with your ID and the following from one of the companies that is witholding your earnings:

1(d) A signed letter or document from the withholding agent on official letterhead, showing your name and evidencing that an ITIN is required to make distributions to you during the current tax year that are subject to IRS information reporting or federal tax withholding.

The letter must be signed in ink, not a printed signature, on company letterhead. Smashwords will send this letter at your request once your earnings with them reach $10, and you can set your payments to deferred in the meantime to avoid them paying out and withholding tax.

Several authors have reported having trouble getting the requisite letter from Amazon, and although CreateSpace have fairly good instructions for this process, they include a downloadable letter for you to print out and include with the W7, which some authors have had returned as unacceptable because it’s not signed in ink. So the easiest way to get the letter is to push sales through Smashwords until you hit the $10 threshold and get your letter that way.

Once you’ve got your letter, your ID and a correctly completed form, you need to send them to

Internal Revenue Service
ITIN Operation
P.O. Box 149342
Austin, TX 78714-9342

unless you use a private mail delivery service, in which case send it to:

Internal Revenue Service
ITIN Operation
Mail Stop 6090-AUSC
3651 S. Interregional, Hwy 35
Austin, TX 78741-0000

Or, if you’re in the UK, you can mail it to the US Embassy at

INTERNAL REVENUE SERVICE
US Embassy
24 Grosvenor Square
London WIA 1AE
United Kingdom

You can even take a chance on a walk in at the embassy on Tuesdays, Wednesdays or Thursday between 9:00 am – 1:00 pm and 2:00 pm – 4:00 pm, or use an acceptance agency. Then you wait, and if and if you’ve dotted all the “i’s,” crossed the “t’s” and it’s sunny on the dark side of the moon, in six to eight weeks you should have your ITIN.

 

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