If you are a non-US author your royalties from your US book sales will be subject to a 30% withholding tax until or unless you complete the necessary paperwork to claim full or part exemption.
The amount of exemption you can claim depends on the tax treaty your country has with the US. If you’re based in the UK the withholding rate is 0%, so you can claim full exemption if you wish. (In this case, you then declare the foreign income on your UK personal or company tax return and pay tax on it in the UK.)
You can check which countries have a tax treaty with the USA here. From a quick glance I can’t see a handy list of withholding rates in this document, so you’ll need to check with your own tax department to get the withholding rate for your country.
Key steps to claim reduced or no US withholding tax
In short these are:
- Obtain a tax identification number – called an ITIN (Individual Tax Identification Number) for individuals or an EIN (Employer Identification Number) for businesses – including limited companies or sole traders outside the USA.
- Complete and send a form W8-BEN, which includes your US tax ID, to each of your US distributors – they will then be able to pay your royalties in line with the exemption amount instead of automatically withholding 30% tax. (You can probably ask them to defer paying you any royalties until they have the form.)
Getting an individual tax ITIN takes many weeks, so make a start as soon as you can. Oddly it takes just half an hour to get an EIN if you’re a business. I’ve outlined both processes below. For info, I have an EIN as I self-publish through my limited company – and it really did only take me 30 minutest to get it!
How to get an ITIN if you’re publishing as an individual
This process requires you to take or send your passport to the American Embassy if you are British. (I have an EIN so didn’t use this method. If you’re a limited company or operating as a self-employed sole trader business skip down to the next section.)
- Request an original hand-signed letter from your US book distributor or publisher, addressed to the IRS, which states that you need an ITIN because you are going to receive royalties and wish to apply for a US withholding tax exemption or reduction. (Your distributor probably has a process for issuing these letters, and may make a small charge. But it can can take time: for example, Smashwords says that it can take them 3-6 weeks to snail mail the letter to you.)
- While waiting for your letter, download and compete form W-7 from the IRS website (PDF). (Here are instructions for completing form W-7.)
- If you’re based in the UK, take (or send special delivery) your completed W-7 form, your distributor’s hand-signed letter, and your passport to the American Embassy in London. They need to your passport as evidence that you are British and they need the hand-signed letter to prove that you are being paid by an American company. Copies won’t be accepted.
- From what I have read, it seems that since summer of 2012 they now send your passport along with the other documents to Texas for processing, rather than taking a copy of your passport as they did previously! But see a further note on this below*.
- It can take up to six weeks and sometimes longer to process your application – after which your documents are returned and you are notified from the US of your ITIN.
- Once you receive your ITIN, download and complete form W8-BEN (PDF) – making sure that you include you ITIN on it.
- Now send your completed form W8-BEN to your US distributor/s in accordance with their instructions. Once they have this they can pay your royalties without applying the full 30% witholding tax.
* In the comments section of a blog I read after posting above, a UK author said that the US Embassy in London agreed to send her UK Photo ID Driving Licence away instead of her passport – having already been presented with the original passport and an original birth certificate. Whether this is typical I am not sure – but it’s worth asking about I’d say!
Note: Reading around, it seems that some self-publishers decide the application process is more hassle than it’s worth until they get a measure of their US sales. For example, if you’re an individual based in the UK and pay 20% tax, by not doing anything you will lose out on 10% of your royalties – you then declare the income as ‘taxed at source’ on your tax return.
How to get an EIN if you’re publishing as a business
Bizarrely, it’s a lot simpler for non-US businesses than it is for individuals to get a US tax ID – in fact it just took me half an hour! Don’t be put off by the reference to ‘employer’ – if you are a director of your own company or a sole trader** you can still apply.
- Read the notes on page 2 of the form – these confirm which questions you can miss off since you are only applying to get this EIN for tax withholding purposes.
- Complete the form – you can fill the fields in online and then save and print the form. (See the ‘Tips’ section below for answering question 9a.)
- Next call the IRS’s dedicated line for businesses that are located outside of the US: 1-267-941-1099 (not toll free). You need to have your completed form SS-4 beside you as they will ask you about your entries. (see the ‘Tips’ section below for how to avoid being asked to fax the form.) NB Since I got my EIN it has become harder to get through and there can be long waiting times so if in the UK try calling at 11am our time – apparently the offices there open at 6am Eastern time and the first hour is the quietest.
- They then give you the number over the phone and say to expect it and relevant paperwork in the post in the next 2-3 weeks. And it does…
- Download and complete form W-8BEN-E (PDF) – be sure to enter your EIN on it. Note: (10 April 2014) It seems that a new version of this form was issued in late March 2014, albeit it is dated February 2014. In short it has been separated from the W-8BEN (which is now just for individuals). Further update 10 May 2014 – please read Cazbah‘s comment dated 9 May below. It seems that this new form is not yet ready for use and you need to use the old form until July 2014 – *please read her explanation below*. And yet a further update 12 September 2014 – a comment from Lorna Riley says she got her EIN today and the IRS told her that entities can continue to use the *old* W-8BEN form until the end of the year as they are still so confused by the new one! Scroll down to read her comment. Another update 15 October 2014 – there have been a lot of questions on the Alliance of Independent Authors’ closed Facebook group, and in the CS community, relating to the new online CS tax interview form which doesn’t appear to allow a sole trader to enter their EIN. It seems to me that the CS form has inherited the confusion seen in the new IRS forms, described above. Various work arounds have been suggested from simply saying you are an individual from the outset and then inserting your local country’s tax ID number and no EIN, to entering the EIN into the space provided for the ITIN even though the format is not quite the same, to saying that you are a corporation even though you are a sole trader in which case the EIN option appears. (This last piece of advice was based on a conversation someone had with the IRS office here in London who told him that the IRS doesn’t disntinguish between sole traders and companies when using the term ‘corporation’.) I’ve not had to complete the CS online form so not come up against this issue myself, but I will try to contact the IRS here in London tomorrow to see if I can find an answer. If this hasn’t been updated it means that I’ve not yet managed to get through…. bear with me! But do look at the comments I refer to above if affected by any of this … Further update 28 Oct 2014 I spoke to the IRS here in London finally re the CS questionnaire and the issue for sole traders having nowhere to enter their EIN. In short, the guy there said you should be providing your US tax ID to CS, not your UK one. How you give this info the IRS doesn’t really care – the guy sounded exasperated at CS! – so either: 1/ Say you are business and (where the question comes up about beneficial owner type say you are a corporation (since it won’t let you say you are an individual) and then enter your EIN. OR 2/ Say you are an individual and if the EIN option doesn’t appear just enter your EIN in the ITIN box and see if you can get that to work (I know that some say they have got this to work after a couple of goes.) It’s the US tax ID that CS should be keeping a record of just in case one day they are audited by the IRS and have to justify why they withheld tax. And the way that is done is by giving evidence of the IRS-issued tax numbers that their customers have given them.
If you’ve already done another route and provided your UK tax number I’d probably not panic. He seemed to suggest that the likelihood of an audit happening in this way is fairly remote… but his point was that it would involve CS having to run report of tax IDs and any that don’t fit the EIN or ITIN format would stick out like a sore thumb and the IRS could potentially ask Amazon to pay the tax due on those accounts. But in many ways that sounds as if it would be CS’s problem! *Please note that I am not a tax consultant and am simply providing this info in response to the many queries raised about it. I’ve also not had to complete the CS questionnaire as it came after my time.*
- Send the completed form to your distributors in line with their instructions.
NB: non-US publishing companies cannot apply for an EIN online, so ignore any instructions you see on this as they are directed at US corporations.
Tips for when completing form SS-4 and calling the IRS
- On form SS-4, at question 9a tick ‘Other’ and enter ‘Limited Company (UK)’ or ‘Self-employed Sole Trader UK’. The only other possible option at 9a would be to tick ‘corporation’ – which seems to refer to US incorporated companies. The woman at the IRS I spoke to agreed that my approach seemed the best answer.
- When you call, make it clear that you are the owner/director of the business. I say this because when I first called, the woman told me I would need to fax the form while I was on the phone to her (impossible as I only have one phone line…). At that point I had to come off the phone and had planned to call back on my mobile to enable me to fax whoever took the call (it’s a call centre type set-up), but then found it would cost me 72p per minute to do this! So I called from my landline again and the next woman I spoke to said she could do it over the phone without faxing her the form SS-4 because I was the owner of the business.
- Have the date of incorporation of your company or the date you registered as self-employed to hand. Even though their page 2 instructions said I didn’t need to fill in that info they still asked me for this.
You can find general instructions for completing form SS-4 here.
(**To become a sole trader in the UK you need to register with HM Revenue & Customs as self-employed and fill out a Self Assessment tax return each year where you declare your income from your sole trader business. You pay Class 2 National Insurance if you’re self-employed – and Class 4 if your profits are above a certain level.)
Getting help: US tax offices based in Europe and China
You can find contact details for IRS offices in the UK, France, Germany or China here. I’ve not yet tried this out, but, according to the IRS website, “The IRS offices listed can answer your federal income tax questions, help with account and refund problems, and assist with the preparation of current and prior year tax returns.” I will update this section once I have spoken to them. It’s Columbus day today, so they are closed!
You can read more about withholding tax on the IRS website here.
If you’re a UK author and aren’t sure how to declare you income from books sales, check out my related post on paying UK Income Tax on book royalties