GREAT NEWS: The rules have changed. You no longer need an EIN or an ITIN unless you have extenuating circumstances. Read the update here: Update on Canada Tax Information with the United States. I will leave this original post up for those who still need to apply for an EIN.
* * * ORIGINAL POST * * *
Several months ago I discovered that Smashwords began withholding 30% of my earnings to give to America’s Uncle Sam. If I didn’t act, I’d continue to lose this money for the life of my writing career.
To claim this 30% in the future, I’d have to jump through hoops at 1,000 feet in the air and ride a wild boar through the desert…okay, nothing that drastic, but everything I read and everyone I talked to led me to believe that getting all the paperwork in order would be a time-consuming nightmare.
They couldn’t have been more wrong.
But before I realised the ease of reclaiming that money, I had reluctantly accepted the fact I would lose $300 for every $1,000 I’d earn in royalties. It was hard to swallow. Just think about this for a minute:
You post a book to Smashwords for $2.99. It sells through them to Kindle who takes 30% for selling it plus $0.09 for delivering it to the customer. You’re now left with $2.00. Smashwords takes about $0.14 of this for a service charge (their hand in selling it). You’re now left with $1.86. From this, Uncle Sam withholds 30%, leaving you with $1.30. Withhold means claiming that money as income tax.
Let me paint a bigger picture for you. For every 1,000 books you sell at $2.99, your profit drops from a potential $2999.00 to $1300.00 after all those hands grab what they want. If you didn’t have to pay Uncle Sam, you would have earned $1,860.00. It takes about 30 minutes to get an EIN and complete the proper form to reclaim that money. And you only have to do this once. In my books, $560 for a half hour’s work is an outstanding pay cheque.
The imagined nightmare has discouraged many writers from dealing with the IRS, but it doesn’t have to be like this. You can start claiming that 30% by following the simple steps below. It will take approximately 25 minutes of your time, one long-distant phone call, one completed form and a US stamp. Oh, and one envelope.
1) Forget about the silly ITIN everyone keeps talking about. You don’t need an Individual Tax Identification Number with the IRS to claim the 30% withheld by Smashwords (or Amazon, CreateSpace, etc.). You can read more about the ITIN here. The information is mid-way down the page.
If you’re set on the long, torturous method of going the ITIN route, follow the steps on that web page. I can’t provide further advice because I didn’t go this route.
2) Visit the IRS website and download the SS-4 form to request an EIN (Employer Identification Number). This page provides information about getting an EIN and the link to the form. It provides the option of filling it out on-line, but if you are not an American and do not have an ITIN, you cannot complete the form online. You can however enter the information into the form and print a copy for your records and to aid in the phone conversation.
3) To complete the SS-4 form, fill in the following information:
Legal Name: Spell it as it appears on official documents: driver’s licence, income tax, etc.
Trade name of business: If you set up a company like I did (Quarter Castle Publishing) to sell your books, record it here. If you are using your name as the company, leave this space blank. More on companies in step 6.
Mailing Address: Enter your complete mailing address without abbreviations. In other words, spell out street, Nova Scotia, Canada, etc. Make sure you include your postal code.
Country and state where principal business is located: Again, don’t abbreviate. State the province (Nova Scotia) and the country (Canada).
Name of responsible party: That’s you! Record your name as you did above.
(8a) Is this application for a limited liability company: No
(9a) Type of entity (they’ll ask you this on the phone): Check sole proprietor and go onto question 10.
(10) Reason for applying: check two boxes: Compliance with IRS withholding regulations AND Other (specify): On this space write the following: To obtain a reduced rate of withholding imposed by section 1441 pursuant to an income tax treaty. (I didn’t make this up, but found it on a site which helped me complete the form).
(11) Date business started (they’ll ask for this on the phone): If you do not have a registered company, and you are getting set to publish your first book, use the first day of this month or a day not long ago when you began working towards getting the book published. If you have receipts for work-done (such as from the editor you hired), set a date before then. If you have already self-published a book, pick that date or a date just before then. Regardless pick a date and record it somewhere as your start date.
(12) Closing month of accounting year: To make things simple, I chose December.
(13) Highest Number of employees. I was told to include yourself, so you automatically include one under OTHER. I wrote two because I’d like to hire someone next year to help, but I’m not bound to this.
(14) I checked the box because I didn’t want to file quarterly. Once a year is enough.
(16) Check one: In this instance where you are publishing your own books, check other and record: PUBLISHER.
(17) Indicate principle line of merchandise sold…: books, ebooks
(18) Have you ever applied for an EIN before? I haven’t, so I checked NO.
SIGN AND DATE THE FORM.
By clicking the thumbnail image of the form, you’ll see how I filled it out minus pertinent information.
4) Call this number: 267-941-1099 (this is not a toll-free number; the number on the Kindle Direct Publishing site is wrong; they have 264 instead of 267; There’s no one at that number; CORRECTION: I checked the KDP site (March 7, 2014) and it now contains the correct phone number.) once you have a copy of the SS-4 form in your hand. It’s in Seattle, Washington, so expect a long distance charge. Follow the instructions to get the right department (you’re applying for an EIN), then stay on the line and answer the clerk’s questions. Provide no more information than what is asked. If you are told you need an ITIN to receive an EIN, say thank you, hang up and call back to get another clerk. You don’t need an ITIN to get an EIN.
The clerk will ask most of the questions on the form, so if you have it completed in front of you, you’ll be able to answer quickly. Also expect to spell out everything; they need the proper spelling of your information. Before the clerk lets you go, she will provide your EIN. Write it down, file it, add it to your business information, keep it safe. In about three weeks, you’ll receive a letter from the IRS. Photocopy it, file it, and return the portion they request. It’s to verify your information.
5) Celebrate! You just did what others have been putting off. You have an EIN, so you can start claiming that 30% Uncle Sam wants to keep for himself.
6) With regard to owning a company: Rumour has it you must own a company to get an EIN. If you are self-publishing, you are considered self-employed because you are earning money independently. As a self-employed individual, you are basically running your own company, so get an EIN. Individuals who own a company must register with NS Registry of Joint Stocks, except for those who use their name as their company name. I could easily use Diane Lynn Tibert Publishing and never register or pay a fee. What this says is that you don’t need to be a registered company to be an official company. Treat your business like a company and it is a company.
Learn more about registering a company in Nova Scotia here. If you live in another province, check your business laws because they may be different. The important thing about earning money by independent means is to claim it on your income tax. That’s what the government really wants: your money.
6) Now that you have the EIN, what now? Go to the W-8BEN form on the IRS website and enter your data. You can’t save the form, but you can enter the data and print it off to mail. Print one copy for your files and a copy for each company you plan to distribute your book through.
The questions on the form to concern yourself with are:
(1) Name: Record the same name with the same spelling as you did on the SS-4 form.
(2) Country of incorporation or organisation: If you are simply a single-person company who is selling books through places like Smashwords, you simply note N/A and move on to question 3.
(3) Type of beneficial owner: Check Individual (for an individual and a sole-proprietor)
(4) Permanent residence address: Do not use abbreviations.
(5) Complete if the mailing address is different.
(6) US taxpayer identification number: Enter that lovely EIN you just got from the nice lady on the phone and check the EIN box.
(7) Foreign tax identifying number, if any (optional): I’ve seen others fill this in, but since it was optional, I did not enter my SIN.
(9) I certify that (check all that apply):
a. Check the box and enter CANADA in the blank.
b. Check the box.
I saw a sample form which had question 10 completed, but I also saw one that left it blank. I left it blank and still had the form approved. The information the other site had entered was: The beneficial owner is claiming the provisions of Article XII of the treaty identified on line 9a above to claim a 0 % rate of withholding on (specify type of income): Royalties – 12, Other. Explain the reasons the beneficial owner meets the terms of the treaty article: Beneficial owner is a resident of Canada. (As I mentioned, I did not enter this information)
SIGN, DATE THE FORM and enter SELF in the capacity in which acting.
By clicking the thumbnail image of the form, you’ll see how I filled it out minus pertinent information.
Once the form is completed, print one for your records and one to send to Smashwords. Sign and date both copies. On the top of your page, note your username. Mail the form to:
Smashwords, Inc. Tax Compliance Dept.
15951 Los Gatos Blvd., Ste 16 Los Gatos, CA 95032 USA
If you publish directly to Kindle (Amazon.com) instead of going through Smashwords, you’ll need to send a W-8BEN form to them, too. Fill it out the same way except put your Kindle Account number on the top. Mail the form to:
Amazon Digital Services
Attn: Vendor Maintenance
PO Box 80683, Seattle, WA 98108-0683 USA
If CreateSpace provides the printed version of your book, send a W-8BEN to them, too, noting your ID number. Mail the form to:
8329 West Sunset Road
Las Vegas, NV 89113 USA
Within three weeks, I heard back from Kindle, but I never did hear a peep from Smashwords. I just checked the Payee Page and found that my W-8BEN tax form was received June 12th. That’s two days shy of a month from the time I mailed it to the time they processed it. I mailed the form to CreateSpace only last week, so I don’t expect to hear word from them for another week or two.
You can read the IRS instructions for completing the form here: http://www.irs.gov/instructions/iw8ben/ch01.html
NOTE: W-8BEN forms expire after three years, which means you have to send another form in…you guessed it…three years time. I’m not sure if reminders from these companies will be sent out, so make a note somewhere to check into this in three years.
ALSO NOTE: Regardless if you get an EIN and fill out a W-8BEN form, if you sell directly through Kindle and they sell your book to customers living in countries other than the United States (United Kingdom, France, Spain, Italy, Denmark) you do not get the 30% tax withheld. Taxes are withheld only when customers living in the United States buy your book.
However, I believe if you sell through Smashwords, you do get the tax withheld because it passes through too many hands. For example, if your book is sold to a customer in the UK who bought it from Amazon who bought it from Smashwords who bought it from you…well, I think you get what I mean. I saw no mention of this on Smashwords’ page, so can’t say for certain.
The reason Canadians do not get taxes withheld when selling a product to a customer in the United States is because we have a tax treaty with them. Not every country does.
To learn more about treaties for Canada and other countries, visit this IRS page.
If you found this information helpful, please consider buying me a cup of tea ($1.50) as if we had chatted at a cafe and I shared this with you. [Payment is through PayPal.]
NOTE: You get the full exemption for the first $10,000 (or $3,700, I found both these numbers on the Internet) you earn. After that, you must pay the IRS 5 or 10% of your earnings (Calculated not by the amount your book sells for, but the profit earned from sales since that’s all you’ll see from Smashwords, Amazon and CreateSpace).
BIG NOTE: If you self-publish you are operating a business. As a part of doing business, you must complete certain paper work. Getting your EIN and submitting a W-8BEN is part of doing business. If you plan to publish a book to Smashwords, Amazon (Kindle) or CreateSpace in the next few months, take care of this business now. It takes about a month to get all the paperwork in the hands that need it.
EXTRA BIG NOTE: I am not a tax professional. I only know this from my research on the Internet and going through the experience myself. Please, use this information as a guide only; depending on your circumstances, you may have to provide additional or different information than what I had to. Also, this information is time-sensitive. The government is notorious for changing/updating forms, laws and requirements.
Are you looking for more help on your self-publishing journey? Check out the Self-publishing Resource section of this blog.