The US Tax System Explained for Recruiters Operating From the UK
With over 22 years of experience as an employer of record helping international recruiters to make contract placements in the US staffing market by covering payroll and employment, we get various questions from UK recruiters regarding the US tax system.
And when it comes to the subject of tax, it pays to get it right!
That’s why we asked international tax expert Christina Woskobojnik, from the US/UK accountancy firm Dyke Yaxley LLC to join our very own US expansion expert Maria Drye on a LinkedIn live to explain the US tax system. In our virtual LinkedIn Live session, which is transcribed below, Maria and Christina covered:
Tax requirements when making placements in the US.
What is the W-8BEN-E form and who needs to fill out form W-8B2N-E?
Do UK businesses need a US Tax ID number and how can they get one?
Common mistakes for recruiters to avoid when navigating the US tax system from the UK.
Before we jump in, Christy, tell us a little bit about your tax experience, Dyke Yaxley, and how you support clients entering the US staffing market?
Dyke Yaxley is a US/UK transatlantic cross-border accountancy firm. We have a niche where this is the only treaty that we handle. We work with PGC and international clients when they are considering expanding their business into the US.
We take a holistic approach to helping businesses achieve their expansion goals, whether that’s remaining as a UK entity that is starting to work with US clients or taking the full leap and expanding into the US. Often, their US business expansion goes far beyond just taxation and compliance. We help international clients navigate payroll requirements, US health care, worker’s comp, getting tax ID numbers, and US bank accounts; all of which we will be diving into in this blog.
What advice would you give to companies, specifically UK recruitment companies considering doing business in the US from the UK?
The best thing to do when doing business in the US from the UK is to talk to an advisor to make sure you are compliant with the US tax system. It's important to understand that legal lawyers do not give tax advice and accountants don't give legal advice.
From a taxation perspective, it is good to understand the difference between making a permanent placement in the US vs placing a contract placement. It is also important to understand how contractors are paid, what compliance looks like not only on a federal level but on a state-by-state level.
The great news is that it is easy for a UK recruitment firm to do business with the US, remain compliant and proceed to have great success in the US.
If a recruiter is placing permanent candidates in the US from their UK limited company, why do they need to understand the US tax system?
A recruiter making permanent placements in the US from their UK office has very little US tax system requirements. If you do not have a permanent establishment or a physical connection to the US, on a federal level, the IRS does not identify you to have a tax issue or a tax compliance matter.
50 different states = 50 layers of the US tax system to be aware of
The complexity of the US Tax System comes from the 50 separate states. Since 2018, the Supreme Court made a decision that has allowed states the autonomy to set economic thresholds that require force for certain things and for certain taxes. The US has layers of tax; there is sales tax which relates to your VAT, and there is also some corporation tax.
So, from a US tax system compliance view, federal is not something you need to worry about, but it would be great to track your sales by state. The state you track is the state, which is benefiting from that placement, which is important to note as there could be potential compliance matters.
How do you track sales when making placements in the US staffing market?
When making permanent placements in the US staffing market, you may not always know where that actual placement is going to be located. Perhaps you are working with a large US company; they have locations all throughout the US.
It is beneficial to be aware of the location where your US candidate is working, especially if they are in a remote role, as this is the place you should track that client, track that sale, and that turnover. If you aren't quite sure, then you fall back to where you are invoicing.
US Tax System Requirements Explained When Making Placements in the US
If you are recruiting in the US from the UK, there are currently only five states that charge sales tax on your services. They are:
Washington, D.C.
Connecticut
West Virginia
Pennsylvania
Iowa
“It is important to note that the US tax system is always changing especially after the pandemic and all the relief money expenditure.
States are looking for new streams of revenue. At Dyke Yaxley, we expect some of those rules to change”.
Corporation Tax Requirements When Recruiting in the US
Depending on what state you recruit in, corporation tax may be a requirement. Corporation tax is sometimes referred to as franchise tax, excise tax, or commercial activities tax depending on the state. There are currently ten states that have an economic threshold for corporation taxes that could be due if you cross the threshold in that state. Some states have an economic threshold of $500,000, so if you hit that number in revenue, you must pay corporation taxes. Some states have a threshold of $200,000 before corporation tax is due.
Always research the corporation tax in the state you are operating in.
The general rule Dyke Yaxley always tells clients operating in the US is, if you reach $100,000 in turnover in a particular location, check the rules of that state. Know your corporation tax responsibilities to make sure you are free and clear, and there's nothing that's going to bring you compliance issues. If you check the rules and it highlights a compliance issue, you may need to talk to an expert about it.
There are different types of contractors in the US when making placements, could you explain how they are paid?
There are two different ways to pay a US contractor
There are two different ways to pay a contractor in the US, one is via PAYE or W2 (employee) or else as a 1099 (independent contractor). You can find out more detail about the difference in these employee types in our W2 vs 1099 blog.
There's a danger in both in that once you start paying someone to do work on US soil, you now are crossing the line of establishing this permanent establishment which causes compliance matters to arise.
1. Paying a Contractor as a 1099
If you are paying a contractor on a 1099 basis (as an independent contractor), there needs to another whole separate discussion about what is an LLC, It is important to be aware that this entity that people can create in the US doesn't mean that they're a business. So, there's a danger in thinking it's a B2B transaction.
Engaging contractors operating through their own company is a lot less common in the US than it is in the UK due to more mature legislation which can result in severe penalties for worker misclassification. In the US, on a federal level, the IRS and Department of Labor (DOL) take the stance compliance that everyone is a W-2 employee, unless you can prove otherwise through a robust assessment, that way, employees have more protection in terms of healthcare benefits and rights.
For these reasons there has been a large-scale shift over time of contingent labor into an employed model with workers engaged on a W-2 basis instead of independent contractors.
2. Paying a Contractor as a W2 (Employee)
If you choose the most compliant way to engage contractors in the US, as a PAYE or W2, the best thing to do is to use PGC, a specialized US employer of record.employer of record.
When you use an employer of record to pay US contractors there will be a fee. However, the employer of record handles the following tasks on your behalf when recruiting in the US:
Provides an in-depth explanation of the US tax system.
Creates and issues employment contracts.
Onboards new contractors.
Conducts background checks.
Provides benefits and insurance plans for US contractors, including healthcare (A must for attracting candidates as healthcare is employee sponsored in the US)
Completes and stores Form I-9's.
Manages and keeps on top of changes in federal, state, and local income taxes.
Deducts payroll taxes.
Gathers and stores contractors timesheets.
Processes and deposits payments to contractors.
Responsible for employment compliance.
Can a recruitment company pay US contractors without a payroll provider?
The alternative, if a recruitment firm decides to payroll US contractors alone, means they will have to deal with tax compliance matters. They'll have to legally register in a state, file on a federal and state level and comply with payroll tax rules per contractor. Then they'll also have to organize worker's compensation and health care and pension. So, when it comes to payrolling contract workers, to sum it up, avoid paying anyone directly.
If you do want to get into contract recruitment in the US, it really is good to test out the US market from afar first by working with an employer of record to place and payroll candidates with US clients.
Being aware of misclassification of contract workers and the risks involved in the US are very different to the rules in the UK. PGC can help you form a full understanding of what you need to know to start recruiting in the US staffing market and the employment requirements.
A lot of PGC’s clients ask, “When I am invoicing a fee, let's say a perm introductory fee, do I to put any VAT on that?
Do I put a VAT number on a US invoice?
Let’s start with the look of the invoice. As a business outside of the US, you won’t have registered US addresses. There is no need to put any VAT number on your invoice. If it's there, that's fine.
How do I invoice a US client from the UK? Do I invoice in US dollars?
Your US clients are most likely going to want you to invoice in US dollars. It is fine if you do not set up a US bank account. If your client is willing to pay you in US dollars, it is via a wire transfer for US companies but you don't need to have any of those required items. Whether or not you put VAT on the invoice, from a US tax system perspective, it's not required.
However, it's best to ask your UK accountant if you're across the threshold, is it something you need to consider from a UK standpoint. But from a US tax system standpoint, you do not have to add VAT. If you cross the threshold in one of the above five states, you potentially may have to charge US sales tax.
But again, that's something that should be discussed on a one by one, case by case, state by state basis.
What is the W-8BEN-E form?
There are two forms required when navigating the US tax system.
1) The Domestic Form (W9 Form)
There is a domestic form in the US called the W9, which is simply informational. In this form a domestic US company provides another US company with their legal name, address, US tax entity type, and their tax ID number.
2) The W8-BEN-E Form
Let’s the US client know they don’t have to withhold taxes from the UK company
When you're not a US entity, the US company has the onus of withholding federal tax from a payment to a foreign entity if it's necessary to do so. The W8-BEN-E form allows a UK firm to ensure their US client know they do not have a permanent establishment in the US. This form lets the US client know that the UK company recognize all profits in the United Kingdom and there doesn't have to be a federal withholding taken from any payments that are then issued to the UK entity.
Don’t be intimidated by the W8-BEN-E form.
The W8-BEN-E form is long and looks intimidating, but it really isn't once you understand it. It does require you to quote parts of the treaty where you recognize your business profits in the UK. The client will then put the form in a file, and they will most likely never look at it again.
Who needs to fill out form W-8-BEN-E?
Yes, when you are placing candidates with US clients, it is the end client that needs to ask you fill out form W8-BEN-E because it is the US clients federal responsibility in the US to withhold tax. It again just proves that you do not have any requirement to pay the US government any tax.
If your US client didn't ask you to fill out the W8-BEN-E form, do you have a responsibility to send it?
Absolutely not. At Dyke Yaxley, we always recommend to international businesses operating in the US from afar, that you wait till you're asked for the W8-BEN-E form. If you don't wait until the US client asks you fill out the W8-BEN-E form, and take matters into your own hands, you could send a form over to a procurement department within a company that doesn't understand it. This may cause more questions and confusion.
When will you be asked to fill out form W8-BEN-E?
Most US companies won't pay you until they have the W8-BEN-E form. So, if your US client asks for it, the sooner you can return the form to them, the better, as then it won't hold up the payment to you. From my experience working with international companies doing business in the US, generally, it's asked for during the procurement process when you're providing all the information that the procurement department requires from you. This includes your business terms, your name, your address, your banking information, and they'll generally ask for the W8-BEN-E form during this process.
If recruiters need support completing the W8-BEN-E form, can they get in touch with you?
Absolutely, to be transparent, at Dyke Yaxley, we don't charge anything to give out US tax system advice. We do need to have a conversation to understand your business transaction in the US to ensure that we're not providing written advice incorrectly.
Once I have a conversation with someone who needs to complete the W8-BEN-E form and we understand if the transaction fits the form, then I can provide all the language required in the box that you need to tick on the W8-BEN-Eform. We cover more detail in previous session I did with PGC Group, in on Who Needs to fill out Form W-8BEN-E? Accountancy Advice for UK Companies Operating in the US, if you need additional advice.
Do UK businesses need Tax ID numbers and how can they get one?
You don’t have to get a US tax identification number to complete the W8-BEN-E Form
A Tax ID number in the US is the same thing as your HMRC identifier in the UK. The IRS issues what's called an EIN or FEIN federal tax identification number, which has nine digits. This number is what your US identifier is. You do not have the tax I.D. number on the W-8-BEN-E form. The US client, the end user, may not understand because there's a spot for a federal tax number on the W8-BEN-E form, but that's only if you have one. You do not have to have one in order to complete the W8-BEN-E form.
You do not want to get a US tax identification number or identifier unless you truly need one, because then now the IRS knows about you. You could have some filing requirements on a federal level, maybe not tax payment requirements.
There are reasons why a foreign entity does have a US EIN and there are scenarios where they do. But if you are a UK recruitment firm that's making placements in the US, you do not have to have a tax identification number.
From a US tax perspective, what are the common mistakes UK recruiters make when they enter the US market?
Not speaking to US tax, legal and accountancy experts
A mistake I have witnessed UK recruiters make when they enter the market is not speaking to advisors to get the US tax system explained. It's also good to get a legal perspective because of terms and conditions with US clients when recruiting in the US and different things like that.
Not completing enough research on the best states to recruit in
If you are setting up in the US, it's very important that you do your homework and research about where you would like to set up.
Figure out:
Where your talent pool is located
What are the US tax rules in that state and that area
How expensive is it, and what are your options?
At Dyke Yaxley, we see a lot of successful international recruitment firms in the US really studying the market. The other thing I would say is do not avoid using Google for research on the US market. It's okay to use it to get an understanding of the US recruitment vs UK terminology is. However, you can spend a lot of time completing research and not get an accurate picture, whereas you can speak to certain US advisors that, like Dyke Yaxley and PGC, who are happy to give some initial guidance to help with that.
Not understanding that 50 different states is like 50 different countries
A common mistake recruiters make when entering the US, is not understanding the complexity of the 50 states, please remember that. You cannot move around freely in the US like you can in the UK without compliance matters and potential tax matters arising. If you are recruiting in different states, make sure that you have a good understanding of the different state requirements in terms of taxes and employment laws. Don't do it on your own.
Not understanding requirements when payrolling US contractors
A common mistake UK recruiters make in the US, which we previously touched on, is understanding their requirements when paying US contractors. It’s very important to understand the complexity of payroll tax, health care, pension, and worker's compensation in the US. Understanding the complexity of US employment will help you make the right decision on how you want to move forward with placing contractors in the US.
Expanding to the traditionally popular states with high business taxes
A common mistake we have witnessed is UK recruiters jumping straight into US expansion and choosing more expensive state business tax like New York. They then realized that their main hub of clients are not located in New York and end up paying one of the highest rates of business tax in the US. The lesson here is that they have perhaps not fully understood the different state taxes, business taxes, and income tax for their employees. Instead, they could’ve completed more research on where their target US clients are based, and more business-friendly states for taxes.
What are the most tax friendly states?
Every state has autonomy to pass their own tax rules and other regulations as long as they don't supersede federal rules. This means the sales tax rate is different in every state, with some states having multiple rates within the state. Each one of the 50 states can set their own corporation tax rates and rules. That that's the key thing to understand about the 50 states that they operate almost like 50 separate countries or 50 separate entities.
The US is very regional, there are expensive parts of the US, areas in the Northeast and West Coast are always going to be more expensive. There are certain states that don't charge an individual income withholding tax. These states will still have a corporation franchise type tax, but the cost of living is less. The municipal which we get down to the city level of taxes also don't exist in certain states.
Popular states for UK recruiters entering the US market
At Dyke Yaxley, we are seeing clients right now looking at Florida, Texas, North Carolina, and Tennessee is starting to be looked at. For servicing the West Coast, recruiters are looking at Arizona and the Midwest area of the United States. The Great Lakes region is generally affordable, they don't have harsh tax regimes, are easily connected to the US and have good time zones. Recruiters are shying away from the pre-pandemic states such as New York and California.
What does creating a tax nexus mean within the US tax system?
A Nexus means connection. You have two ways to connect to the US:
1) Physical Connection
This involves creating a physical connection to the US which could involve paying an agent or contract, directly hiring someone in the US, or incorporating/setting up a US office.
2) Economic Connection
An economic connection is where the US tax thresholds are set. When you reach a certain threshold of turnover by doing business in a state, not profit, then you can potentially create a connection to that state that then requires compliance.
Items that do not create a nexus in the US
If you get a PO box or a US dollars account or number, that's not a physical nexus that you are creating. Getting a US virtual address, virtual office, and US telephone number does not create that nexus.
It’s important to note that opening a US bank account does create a nexus. However, having a US dollar account through an FX company or in the UK, does not.
How much revenue should a UK recruitment agency generate before deciding to look at the US, specifically from a tax perspective?
The revenue UK recruiters operating in the US generate has nothing to do with incorporating in the US. At Dyke Yaxley, we know clients who have only worked out of their UK business and been very successful in the US without setting up an entity.
Questions to ask yourself before incorporating in the US
What you really must ask yourself at the start of your US expansion is physical based questions:
Do you want feet on the ground in the US to represent you? If so, then you'd likely need a US entity.
Do you want to transfer a UK employee to the US? If so, you will need to start the visa process, which you will then need a US entity for.
Does your US client want to work with a US entity? Some only want to work with businesses from the US. For example, for optics, you need to have a US incorporated business, if you open a bank account in the US.
Always look at the physical things first, if you’d like to send employees to the US and organize visas, you will need an entity. However, if you wish to continue to operate out of the UK and stay there whilst making placements in the US – there is no reason why not to!
Need Help Navigating the US Tax System When Recruiting in the US?
By now you should have a good understanding of the common US tax system terms you may come across when recruiting in the US market form the UK. If you have any other questions on the US tax system, reach out to Dyke Yaxley for expert advice.
If you need guidance on how to start recruiting in the US from the UK, PGC are here to help! We’ve been helping UK recruiters make placements with US clients from their UK office for over 22 years now, ensuring all things payroll and compliance is covered.
If you are interested in seeing what opportunities exist in the US for you, find out how we can help get you started in the largest staffing market in the world!
Disclaimer: PGC does not endorse any personal views or opinions of the interviewee. All information here is for general informational purposes only and is not intended to be a substitute for professional and/or legal services.