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30% tax deducted at source (USA)
Thread poster: GeorginaW
GeorginaW  Identity Verified
Germany
Local time: 22:58
German to English
Apr 26, 2008

I'm about to sign for a job with a US client and have received a whole lot of forms to fill in, one of which is about withholding tax. I have looked at the Latvia and Poland threads on this subject, but I think the tax jurisdictions are v different.
As I have squeezed my prices right down because of the $/Euro situation, I am not pleased at the thought of a 30 per cent withholding tax being docked by the client. Is this normal?
Does any German ProZ member know whether I then have to pay double tax in Germany? V grateful for help on this (maybe it's a stupid question....)


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Ivana Friis Wilson  Identity Verified
United Kingdom
Local time: 21:58
Member (2008)
English to Danish
+ ...
Withholding tax? Why? Apr 26, 2008

As far as I know (think I wrote this in the Latvia thread aswell), you only pay tax in the country where you do the work - in your case Germany.

Why do they want to withhold tax?

Do you have an accountant? If not, you can ask your local tax authority.

I asked my accountant about this in regards to VAT, and he said only tax and VAT in the country you work. I am sure this does not only apply to Denmark, I am sure it is similar in Germany. The service you provide is bought by the client in the US


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Iza Szczypka  Identity Verified
Spain
Local time: 22:58
English to Polish
+ ...
From IRS site Apr 26, 2008

http://www.irs.gov/publications/p54/ch02.html#d0e1826

30% Flat Rate Withholding

Generally, U.S. payers of income other than wages, such as dividends and royalties, are required to withhold tax at a flat 30% (or lower treaty) rate on nonwage income paid to nonresident aliens. If you are a U.S. citizen or resident alien and this tax is withheld in error from payments to you because you have a foreign address, you should notify the payer of the income to stop the withholding. Use Form W-9 to notify the payer.

More on the W-9 form: http://www.irs.gov/instructions/iw9/index.html

Seems they consider your payment royalties rather than wages...

Hope this helps.

P.S. You could always claim the money back in your German tax return under the German-US double taxation treaty, but...

[Edited at 2008-04-26 19:05]


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Lynda Tharratt  Identity Verified
Local time: 16:58
Member (2006)
Spanish to English
+ ...
as far as I know... Apr 26, 2008

you are considered a contractor and as such, you are charging them for services rendered (which is why you issue invoices) and it is incumbent upon you to pay the tax at your end. I have worked for many US companies and never had tax withheld. The same applies in Canada where I (as a self-employed person) am responsible for reporting and paying my own income taxes. It would be like deducting tax from the money you have to pay a plumber to come in and fix a leak!

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Lynda Tharratt  Identity Verified
Local time: 16:58
Member (2006)
Spanish to English
+ ...
check this out... Apr 26, 2008

From the IRS website: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

Independent Contractors vs. Employees (Worker Classification)

It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be -

An independent contractor
An employee (common-law employee)
A statutory employee
A statutory nonemployee
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.


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Ivana Friis Wilson  Identity Verified
United Kingdom
Local time: 21:58
Member (2008)
English to Danish
+ ...
Maybe they just made a mistake Apr 26, 2008

- maybe by mistake sent you forms they normally send to US-based employees - they are not neccesarily an evil Latvian-scam-company

If I were you, I would politely point out that you are not based in the US and that they don't have to worry about the tax, because you pay the German tax. And see what they say.


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Joan Berglund  Identity Verified
United States
Local time: 16:58
Member (2008)
French to English
This does seem odd Apr 26, 2008

I am going to ask my sister who is a PM at a US agency if she has heard this, I know they have some European freelancers, I am not sure specifically about Germany. As a US citizen, I have never had an agency in the US or Europe do any witholding, I can't imagine why it would be different for some one who was a foreign national and not even liable for US taxes. However, they may know something we don't or may just be making an honest mistake. I will post again if I hear anything useful, otherwise maybe just ask them politely to explain the requirement to you, with a link to the relevent rule on the IRS -- always friendly and helpful -- site.

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Katalin Horváth McClure  Identity Verified
United States
Local time: 16:58
Member (2002)
English to Hungarian
+ ...
Form W-8BEN for non US citizens, W-9 for US citizens Apr 27, 2008

It would make the situation more clear if you could tell us which form you got from the company.
Anyway:

I assume you are NOT a US citizen living abroad, but a German citizen.
In that case, the US company should not withhold taxes.
They are probably confused about it, or as somebody suggested just sent you the usual package of forms.
If any, they only should be asking you to fill in a W-8BEN form, which is to certify that you are NOT a US person.
The form is here:
http://www.irs.gov/pub/irs-pdf/fw8ben.pdf

If you ARE a US citizen, then you need to fill out a W-9 form, with your US tax ID. This tells the company and the IRS that you will be paying your federal taxes on your own, so they don't need to withhold anything.
The W-9 form is here:
http://www.irs.gov/pub/irs-pdf/fw9.pdf



[Módosítva: 2008-04-27 02:28]


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GeorginaW  Identity Verified
Germany
Local time: 22:58
German to English
TOPIC STARTER
IRS Form for non-resident Apr 27, 2008

First - thank you all so much for the support and information. Yesterday I may have misread everything - didn't have time to read everything through and was in panic.

The first thing I read re Form W-8BEN (IRS form for non-US citizens) was "Foreign persons are subject to US tax at a 30% rate on income they receive from US sources that consist of.....compensation for...services performed". I have seven pages of instructions for W-8BEN which I will now plough through. I am an EU citizen living in Germany, so I will have to send this one back.

It's a good idea to ask my accountant, which I'll do tomorrow and report back.


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Nicole Schnell  Identity Verified
United States
Local time: 13:58
English to German
+ ...
There is no such thing as withholding taxes Apr 27, 2008

Sorry. There is no such thing as double-taxing.

Greetings,

Schnell Creative Group, Inc.

Why do you squeeze your prizes, BTW? Raise them. We are pretty aware of the currency exchange.



Addendum: As long as you are not running a subsidiary of your international company in the USA

[Edited at 2008-04-27 12:20]


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Daina Jauntirans  Identity Verified
Local time: 15:58
Member (2005)
German to English
+ ...
Tax should not be withheld Apr 27, 2008

I (very) occasionally pay freelancers in Germany or elsewhere for work performed for me, a US company. According to my US accountant, I have to have this form on file establishing that the freelancer is a foreign individual/business abroad so that I do not have to withhold any tax.

The wording of the instructions for the form are pretty confusing, but this is what my US accountant tells me. The freelancers I use take care of their own tax, since they don't have a tax liability in the US. As Nicole says, if we were to withhold tax, that would be double taxation, and the US has a double taxation agreement with Germany.

[Edited at 2008-04-27 12:27]

[Edited at 2008-04-27 23:59]


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Nicole Schnell  Identity Verified
United States
Local time: 13:58
English to German
+ ...
I absolutely agree, Daina Apr 27, 2008

If amounts higher than $ 500 have been paid to vendors in foreign countries we have to deal with extra forms (yum!!) to prove that we are not indulging in money laundering. No vendor however will be pestered with this particular pain in the neck whatsoever.

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xxxPeter Manda
Local time: 16:58
German to English
+ ...
no tax on income to freelance Apr 27, 2008

if you are a freelance, whether you are a US citizen or not, the outsourcer should not be withholding tax. if the outsourcer is withholding tax, they are deeming you an employee.

if they are considering you an employee, ask them for health insurance, a dental and pension plan at favorable rates, and all other benefits that are appropriate for employees (including 14 days paid vacation).

[Edited at 2008-04-27 13:55]


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Thorson
Local time: 22:58
Danish to English
That's for US residents Apr 27, 2008

GeorginaW wrote:

First - thank you all so much for the support and information. Yesterday I may have misread everything - didn't have time to read everything through and was in panic.

The first thing I read re Form W-8BEN (IRS form for non-US citizens) was "Foreign persons are subject to US tax at a 30% rate on income they receive from US sources that consist of.....compensation for...services performed". I have seven pages of instructions for W-8BEN which I will now plough through. I am an EU citizen living in Germany, so I will have to send this one back.

It's a good idea to ask my accountant, which I'll do tomorrow and report back.


That's for US residents, and on regular employee income.



[Edited at 2008-04-27 23:41]


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Katalin Horváth McClure  Identity Verified
United States
Local time: 16:58
Member (2002)
English to Hungarian
+ ...
W8-BEN is NOT for US residents May 1, 2008

Thorson wrote:

That's for US residents, and on regular employee income.


Incorrect. Please read the very first line of the W8-BEN document.
Do not use this form for:
-A U.S. citizen or other U.S. person, including a resident alien individual
Instead, use Form W9


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