How to Navigate the U.S. Tax System: An International Tax Managers Advice

It keeps business owners up at night. The thought of a visit from the IRS who tells you that you’ve underpaid thousands of dollars. But you didn’t even know you had any taxes due at all, and what even is a tax nexus?! It’s easy to get confused with all the ins and outs of the U.S. tax system even if you’ve been doing business in the U.S. for a while.

The good news is that we recently spoke to Christina Woskobojnik, an International Tax Manager at Dyke Yaxley, who works with companies that are expanding their businesses to the U.S. If you’re operating in the U.S. already, or considering an expansion, then this interview is for you!

What advice do you give when businesses are trying to decide where to establish their entity in the U.S.?                                      

1. Use your network

The first thing Dyke Yaxley tells recruitment firms in the UK expanding to the U.S. is to use their network. Recruitment firms from the UK are opening offices all across the U.S., meaning there is a wealth of knowledge that you can tap into from people who are already operating in that market and have gone through the U.S. expansion process.

2. Think about your client base

Is there a necessity for you to be in a certain area of the U.S. based on your client base? If not, then you should look at the different tax rules, the cost of living, and the cost of doing business across the 50 states and choose accordingly based on your requirements.

New York and California are expensive in terms of rent and taxes. There are various taxes that are due in each of those states, as well as in the municipalities within the states.

You should also consider different states’ time differences with the UK. For example, in Illinois, the time difference between the U.S. and UK is only five hours, which isn’t excessive and you can get direct flights from the UK in and out of Chicago very easily.

3. Do you want to set up your entity where you are physically based?

If you are moving your business to the U.S., ask yourself do you want to set your entity up where you are physically going to be based? If you decide you’re physically going to be in an office in Chicago, do you want your entity to in Illinois? It doesn’t have to be, but you may decide it is best for ease of doing business. A huge number of foreign companies set up their entity in Delaware for tax purposes. Therefore, it is really important to think about what your needs are as a business.

Why do a lot of foreign companies set their business up in Delaware for tax purposes?

Delaware is well-known for its corporate-friendly processes, if you decide to incorporate your business in the state you have two simple requirements. One, is you must pay a Registered Agent, every state requires this, it can be anywhere from $100-$250 per year depending on the company. You will make one simple franchise tax filing every March 1st, which is approximately $225-$300 depending on your entity. Delaware is acknowledged as a fantastic place to incorporate your business in as you can maintain a corporation for under $500 a year.

Once you incorporate in Delaware, you can move your base to another state and register there or you may decide to expand into additional states. Another advantage of incorporating in Delaware is that it makes it easier to sell your business in the future than in other states. Therefore, Delaware is a great place to set up your business in the U.S., especially if you are only testing the water.

What advice would you give from a tax perspective when setting up a business in the U.S. with the intention to sell in the future?

Delaware makes it very easy for you to sell your business. If you incorporate in, for example, New York, and then you decide to move your business, it is a little more costly to transfer business to new ownership, whereas Delaware has fewer requirements. If you are planning on selling your business in the future in the U.S., you should have an attorney involved in the conversation as they have a greater level of expertise knowledge around these laws.

From a tax aspect, in the U.S. there are 50 different economies under one umbrella where they all have different rules, with some competing to attract businesses via their tax requirements. Let’s take Delaware again as an example, it is a small state but is close to Washington D.C., the capital city of the U.S., making it attractive due to the ease of doing business there along with the lower tax revenues it offers.

COVID-19 is changing the landscape. New York historically has always been a hot spot for businesses setting up offices in order to attend to clients they are servicing. However, COVID-19 has proven that you do not necessarily need to be in Manhattan, to attract and keep your clients. So, now more so than ever, states are going to be offering incentives to make doing business in their state attractive.

If a recruitment agency has a U.S. entity and their billing a client from the U.S., what are the main things they should consider?

Each state in the U.S. has its own legislative authority, they can choose their tax rates and what is deemed a taxable transaction in terms of sales tax. In most states in the U.S. recruitment services are not taxable for sales tax purposes, so billing a client should remain relatively straightforward.

Very few states charge sales tax on employment and recruitment services, however, if you're not registered or incorporated in a particular state, you have to reach a certain threshold before you have to worry about sales tax.

There really aren’t any major differences between billing your client in the UK, and billing a client in the U.S. The advice we give anyone who has a taxable presence in the U.S. for sales tax is to establish a tracking mechanism for your sales. This will enable you to know how many sales you make, their value, and how many transactions you make into that state.

Any other questions on how to navigatethe U.S. tax system?

If you have any other questions on navigating the tax system in the U.S., reach out to Christina at Dyke Yaxley for additional expert advice. Otherwise, if the U.S. tax requirements seem too complex to get your head around, have you considered using an employer of record? By doing so, you won’t have to establish a business entity or worry about keeping on top of everchanging U.S. tax changes.

Disclaimer: The information provided here does not, and is not intended to, constitute legal advice. Instead, the information and content available are for general informational purposes only.