Jonathan Strassberg at Truecourse Law (who helps UK companies expand into the USA) shares why companies shouldn’t underestimate the complexity of taking on staff when they move into the US. The consequences of getting it wrong can be significant. Here’s our summary from Jonathan’s blog highlighting some key risks to consider.
The question of employment status is more complicated than in the UK
The question of whether someone is employed (as an employee or worker) or self-employed (as an independent contractor) is often discussed and litigated in the UK and EU countries, and in the US the issue is even more complicated.
It doesn’t help that there are two sets of rules which apply, federal and state. The federal rules impact on the payment of federal corporate income tax; the state rules relate to issues of state corporate income tax, payroll tax and sales tax.
Employee or independent contractor?
UK companies looking to ‘test the water’ in the US or establish a foothold will want to use personnel based in and familiar with the US. The choice is to take them on either directly or through an ‘employer of record’ (EOR) or directly engage them as independent contractors.
However, like in the UK, the question of whether someone really is an independent contractor or is in fact an employee is important to understand. Businesses should take advice on this, particularly if the individual works full-time for the company or is in California (where a new law introduced in 2020 is more restrictive).
The crucial question is whether there is a ‘nexus’?
On the face of it, the independent contractor route might seem more flexible and cost-effective for both parties. However, this is often not the case. Under US law, a company must register to do business and pay income tax in any state in which it has a ‘nexus’.
A state nexus is simply a presence in the state that is substantial. Not all activities qualify, but it’s crucial to understand which do and which don’t.
The work done by an independent contractor for the company may establish a nexus. As a very general rule of thumb, if the contractor is facing and dealing with customers the chances are that he or she has created a nexus.
Getting it wrong can be expensive
Failing to recognise that a nexus has been created and therefore not registering or paying tax in the appropriate state where your business is operating is likely to result in significant liabilities.
You can read Jonathan’s full blog here: Using independent contractors to service your US clients is a complicated and risky strategy. And if you’re expanding into new markets and need help or simply want to discuss the process and how to avoid some of the common pitfalls (see our service on International Expansion) get in touch.