IT Contracting in the USA – Tax Advice for UK Contractors

IT Contracting in the USA
IT Contracting in the USA

IT Contracting in the USA

Many UK contractors have considered IT Contracting in the USA.

The USA taxes its citizens and, what they call, ‘resident aliens‘ on their worldwide income.

This would include salary, dividends etc that you earn from your limited company. Although different rates may apply to the different sources (see below).

They tax ‘Non-resident aliens‘ on US source income only and, again, different rates may apply to different sources.

In the case of salary and benefits from your limited company, the source is US since the duties of the employment are being performed in the USA. That’s regardless of when or where payments come from.

However, dividends from your limited company (assuming this is not deemed to have a permanent establishment in the USA – see below) would be from a non-US source. That’s regardless of where the dividends are received.

There is therefore scope for tax mitigation here in the event you do not become a US tax resident. Although you may also need to consider non-US taxes.

Resident Alien for US Tax Purposes

They treat an individual as a ‘resident alien‘ for US tax purposes if they’re within either of the following categories:-

1) They are a ‘green card‘ holder, i.e., they are a lawful, permanent resident for immigration purposes;
2) They meet the US ‘substantial presence test‘.

Substantial Presence Test in USA

‘Substantial presence‘ under this test means being present in the USA for at least 31 days in the year concerned. That’s as well as being present in the USA for at least 183 days in that and the previous two years. They calculate it as follows:-

1) All days of the year concerned;
2) 1/3 of the days for the first preceding year;
3) 1/6 of the days for the second preceding year.

There are special rules to determine the assessable income where an individual is resident for only part of a year as well as an election that may be made if beneficial. It is essential to obtain specialist US tax advice in this respect.

Double Tax Treaties

If you are in the USA for less than a relevant 183 day (approximately six months) period and are tax resident (and paying taxes on your salary/benefits) elsewhere then it may be possible and desirable for you to claim tax relief under a particular Double Tax Treaty.

The relevant 183 day period is either 183 days in a calendar year or in any period of 12 months. That depends upon the particular treaty.

The Double Tax Treaty with the UK, for example, looks at 183 days in any 12 month period. This could therefore span a US tax (which is a calendar) year.

So, for example, you could work in the USA from 1 October through to the following 15 March and, whilst possibly being tax resident in the USA under the ‘substantial presence test‘ through having had prior presence in the USA, could claim to be exempt from US tax under a Double Tax Treaty which considers 183 days in any 12 month period.

This is on the basis that, during the period concerned, you were tax resident in the other country. You were paying taxes on your salary and benefits there.

Unfortunately, the same approach will not work with regard to any dividends you receive.

Exemption Under Double Tax Treaty

In some cases, it would be beneficial, from a tax standpoint, to claim exemption under a Double Tax Treaty. For example, if your other country of tax residence levies much lower taxes, e.g., as with, perhaps, Singapore.

In other cases, whilst the tax liability may be broadly similar, as with, perhaps, the UK and Germany, particularly with higher levels of income but depending upon any US State and City taxes also due, claiming exemption under a Double Tax Treaty offers administrative convenience and savings in professional fees (payroll bureau, tax return filing etc).

You will need to seek specialist tax advice from a US accountant or tax lawyer as regards any need to submit a formal claim for relief under the particular Double Tax Treaty concerned.

Apart from the 183 day rule, the other criteria for obtaining relief are that:-

1. a non-US company pays you

2. that the costs of your employment are borne by a non-US company.

You should not, generally, have a problem satisfying these criteria.

IT Contracting in the USA – Withholding Obligations

Where US income taxes are due in respect of salary received for work performed in the USA, generally speaking, they should be withheld at source. You should hand them over to the Internal Revenue Service (IRS).

Although there is a view that a non-US employer is not obliged to make US payroll deductions, such a view would lead to interest and possibly penalties being charged in respect of the outstanding tax calculated via the individual‘s personal US Return.

You should contact an accountant or tax lawyer in the USA to discuss the practicalities of your limited company making and remitting US payroll deductions.

Maybe using a US payroll bureau will be the most straight-forward way of meeting your employer obligations.

Social Security – International Aspects

As an employee of a non-US limited company seconded to the USA, depending upon the country of tax residence of your company and, perhaps, your own nationality, it may be possible for you to remain within your home country social security scheme for a period of up to five years.

This will be the case if the USA has a Totalisation Agreement covering social security contributions with the country of your employer or, in some cases, the country of your nationality.

You will need to seek specific advice from a US accountant or tax lawyer to establish whether there is a relevant agreement that can apply to you, especially since new agreements are being made on an ongoing basis.

Any relevant Totalisation Agreement will cover the contributions of both employer and employee.

Certificate of Coverage for IT Contracting in the USA

It will be necessary for you to apply for a ‘Certificate of Coverage‘ from the organisation dealing with social security in your home country. In making the application, you will probably require assistance from a tax advisor in the country of tax residence of your company. This will be someone who happens to specialise in expatriate matters.

Obtaining the Certificate will enable you (as employer and employee) to continue to pay into your home social security scheme. It will thereby protect your entitlement, as an individual, to social security benefits, particularly pensions.

Take Out Private Healthcare

At the same time, you would normally apply for a certificate covering you for publicly-available health care in the USA. Although you should note that there are strict criteria for eligibility in this regard. The recommendation would be to take out private health care cover whilst you are working in the USA.

If your home country contributions are higher than in the USA, e.g., as in France, it could be that you would prefer to pay social security in the USA instead. In this case, you would not make an application for a certificate to keep you in your home country scheme. You would withhold US Social Security and Medicare contributions together with the tax withholding.

IT Contracting in the USA – Corporate Tax Considerations

Your company will only be subject to US corporation tax if it has a permanent establishment in the USA. Whilst this is generally an office or branch, they can deem a permanent establishment to exist if the actual operations take place in the USA.

To avoid this deeming provision, you should draw up and sign contracts outside of the USA. Also avoid having US letterhead, business cards, name plate etc.

Aside from the fact that US corporation tax may be more than in your home country, there are a number of other obligations you would have to meet as a US company. You would wish to avoid these if at all possible.

Individual Tax Rates and Allowances

Since tax rates and allowances generally change on a calendar year basis, it is best to obtain specific advice from a US accountant or tax lawyer at the appropriate time.

This also affects the availability of itemised and standard deductions. These may be more, or less generous than what you are used to.

IT Contracting in the USA – US Federal Tax

As well as US Federal tax, most states and a number of municipal authorities impose income tax on individuals working or residing within their jurisdictions. For example, if you are resident in New York, you will be liable for Federal, New York State and New York City taxes.

At the top end of the scale, the tax rate could reach as high as 49%. However, the top rate of Federal tax starts at a much higher level than, say, in the UK. That’s especially for married taxpayers filing jointly with their spouse.

Because of the fairly generous availability of tax deductions, on moderately high income (C£80,000), the average rate tends to be less than the UK and most other European countries.

IT Contracting in the USA – Social Security Contributions

Social security contributions tend to be around double the UK liability for an employee. However, it is considerably less for an employer. This is dependent upon the level of income involved.

This is because the liability is, at least in part, capped.

As a temporary worker in the US on an assignment of less than one year, it may be possible to claim generous tax deductions for housing, living and travel expenses.

It is essential that specialist advice is sought in this regard when IT Contracting in the USA.