timminz

Hi all,

This is my first post here. I have a slightly complicated situation:

I am British, and a legal permanent resident of the USA on basis of marriage. I moved here two weeks ago.

I'm about to start working on a contract basis for my old company in the UK (I'm a software engineer so I can do it remotely).

As far as employment is concerned, I think I can either
(1) set myself up as self-employed in the US and bill the UK company in dollars, or
(2) bill them in British pounds through my Dad's contracting company in the UK, and get him to pay me as his employee through my UK bank account which I'll XE trade over (and then declare my income to the IRS).

I'm confused about how I'll get stung for tax though. Am I subjected to the same rate of tax in the US for either situation? Also, if I am effectively an employee of a UK company living in the US, do I still have to pay UK taxes?

This is a bit of a minefield, I'm not entirely sure the US accountants around here will really know what they're talking about either.

I'd really appreciate any suggestions!

Thanks,
Tim

Michael

Normally if you are self-employeed, you are required to pay the employers share of social security and medicare taxes.

Billing the company through you dads contracting company can be even more of an issue because besides the above taxes, he will be responsible employers state taxes such as unemployment insurance.

However, either way, make sure that the pay you receive will be at least 50% more than the pervailing rate of an employee since you may be responsible for those taxes, may not be paid for vacation and holidays, and probably will not be provided benefits such as health insurance, dental insurance, life insurance, disability insurance, and employer sponsored pension benefits.

timminz

Thanks for your quick reply!

timminz

According to the IRS site,
So doesn't that essentially mean I'd be paying a similar rate of tax to what I'd be paying as a normal employee?

Thanks,
Tim

Michael

The self-employment tax in the United States is currently set at 15.30% which is the equivalent of the combined contributions of the employee and employer under the FICA tax. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare. The social security portion of the self-employment tax only applies to the first $97,500 of income for the 2007 tax year. There is no limit to the amount that is taxable under the 2.9% Medicare portion of the self-employment tax.

http://en.wikipedia.org/wiki/Self-employment

If you are an employee, you would pay 6.2% social security tax on the first $97,500 of your income and 1.45% for medicare on all your income. The employer pays the same amount of both taxes.

penguinsix

Basically, if a company hires a person for $50,000 a year, it costs them something like $55,000 when you add in all the extra taxes they have to pay, unemployment, Social Security, etc. You never really see this though as your paycheck says 50,000-your taxes.

However, when you're self-employed, you are responsible not only for your taxes, but that bit the company would have paid as well.

That's a sort of rough outline.

If you go through your father's company, then technically he starts to run into a bit of a mess as he's supposed to be paying that tax (eventhough he is overseas). Many companies overseas would like to avoid any paperwork with the US if at all possible.

What some overseas companies due is set up a US 'shell' company and funnel the payments through the shell company. You, as the employee, get a paycheck from a US company (XYZ Consulting, LLC of Delaware) and the company overseas pays them directly (not you, as an individual, thus avoiding the tax issue for them). XYZ company, if set up right, will have no taxable income and thus no tax due.

Unfortunately it seems it is either you (or a shell) or your father having to pay the extra tax bit.

Again, this is rough so you might want to contact some tax professionals for some better advice. Don't go to your average accountant as they probably don't have experience in this, but consider finding one specializing in expat tax issues (many in NY, DC and in London). There is a good list on the US expats in the UK website of accountants over there who have probably been through things like this before.

http://talk.uk-yankee.com/

timminz

That's a great reply, and very useful. I'll check out one of the specialist accountants; Washington DC is about an hour from here.

I don't mind paying the extra tax really, since this is a short-term situation to keep me earning until we move to Philly in a few months.

Also, the 15% tax rate is still about half what I was paying in the UK.

It's just strange that the self-employed get taxed harder in a country where entrepreneurial behaviour is so important.

I arrived nearly three weeks ago too, and still haven't received my SSN, so I don't know what's up with that!

Thanks again,
Tim

Michael

That is not the only tax you pay but those taxes are just the taxes for retirement, disability, and medicial for the aged. You also have federal and state income taxes (not all states).

Taxes in the US account for approximately 30% of GDP (federal income, state income, social security and medicare, sale taxes, property taxes, corportate income, import, and excise taxes. The UK taxes accounts for approximately 37% of GDP. France and most of northern Europe taxes account for 50% or more of GDP.

The US is normally taxed on more levels and is usually more in your face than most of Europe.

Bob

don't forget as someone who's self employed, you file quarterly.

aceastwood

I am not an accountant, but:
As a permanent resident you are taxed in the US on worldwide income, so I would expect 1 and 2 to be the same as far as income tax goes (others have responded on social security taxes). Option (2) looks like a nightmare to me as it adds complexities for both you and your dad and I don't see that it gains anything. You look to be in more danger of paying higher UK taxes and NI.

timminz

I went to see a CPA today, he said more-or-less the same thing. I just have to try to claw back some of the extra self-employment taxes through expenses.

It's just a bit of a pity that I'm ending up paying pretty much what I was in the UK in taxes, and I don't even get health care out of it!

Oh well.