Blog, News and Links

Tax Considerations of Working with US Contractors and LLCs

By Christina Woskobojnik, Tax Manager, Dyke Yaxley, LLC

The US provides a wide range of prospects for foreign investment due to its size, scope of industries represented, and population alone. One industry finding great success in this market is the area of recruitment services. There are numerous niches for which recruitment services are vital, translating into many opportunities and successes to be had.

The United States is made up of 50 individual states with very different economies and regulations.  Therefore, as a result, the US tax system has many complexities, which makes it critical for businesses to understand what ramifications may be triggered by movements made within the country. 

The topic of nexus or establishing a presence and obligations for companies doing business in a state to collect and pay tax on sales in a particular state, is important to understand since each state’s jurisdiction offers different opportunities and consequences. There are multiple ways to create this presence, with the most common being setting up a physical address in a state, leasing office space, or hiring employees or representatives of your company for this location. 

Recruitment firms who supply contracted workers can find themselves in an especially vulnerable spot if they do not have a thorough understanding of these three topics:

  • Paying the contractor directly, rather than using an Employer of Record to do so;
  • Understanding the entity type of an individual contractor; and
  • Recognizing that the average US taxpayer does not fully understand the topic of nexus or employment classification.

One solution to this scenario within the US is the formation of an entity called an LLC. An LLC can be taxed in several ways, including as a single member/sole proprietor, an S-Corporation, a C-Corporation or a Partnership.  The confusion for the recruitment firm oftentimes comes with “LLC” used as part of the name of a contractor they would like to employ. US taxpayers can be classified as self-employed, but it is not viewed the same as being a sole trader in the UK. If a firm pays a subcontractor directly, who is a single member LLC, they may find themselves in a situation where they have established nexus because this is not a B2B or Corp to Corp transaction. This nexus can cause a tax obligation within the US.

The mechanism used to understand how the contractor is set up as a US taxpayer is for them to complete the IRS form W-9.  This is a commonly used form in the United States and requires information such as correct legal name and address and the tax classification of the contractor. Everyone must provide his or her tax identification number and sign the form to certify that the information presented is true and complete.

If you find yourself in this type of situation, I invite you to reach out to me for additional details and for us to review the W-9 form together.

Please “count the cost” – so-to-speak – of engaging directly with a US-based contractor and understanding what best practices to implement. 

Christina Woskobojnik, Tax Manager | Dyke Yaxley, LLC

US M: +1 216 644 3122