If you operate a business in Australia, New Zealand, the United Kingdom, or elsewhere you may have considered — or even attempted — doing business in the United States. With 327 million people and GDP of $20.9 trillion per year, the top reasons for expanding to the U.S. include access to new markets and access to U.S. capital. While expanding into the U.S. has never been simple, it can certainly be lucrative. And once properly established, regulatory compliance and maintenance are fairly straightforward.
The growing ease and acceptance of cloud-based operations and virtual collaboration make international expansion a realistic endeavor for companies of every size. That said, the unique nature of the American federal system of government creates a complex web of laws and regulations from the federal government, 50 state governments, and at the municipal level (cities and counties). Sales tax jurisdictions are perhaps the most notable example of our multi-layered and overlapping system of financial regulation.
Still interested in doing business in the U.S.? We are thrilled to have you!
This guide will provide an overview of what it takes to properly establish and operate in the U.S. To be sure, this guide does NOT cover every scenario. It is essential to consult with experienced legal, accounting and tax advisors familiar with the nuances of international business.
If you’re interested in talking to Aprio Cloud, you can schedule a complimentary consultation. Aprio Cloud offers all-inclusive packages to get you started in the United States with an accounting team that will support you as you grow.
2. Why expand to the United States?
Three primary scenarios bring businesses to the U.S.:
Access to more consumers and businesses
Whether you’ve outgrown your local markets or simply want to grow faster, U.S. business-to-consumer and business-to-business markets are fertile ground. The United States has 327 million people compared to 24.8 in Australia. That’s about 13.3 times larger, and the real GDP is 14.3 times greater. (Source: WolframAlpha) Also, many companies find that U.S. consumers prefer buying from a U.S.-based company when the option is available.
Ease of doing business as a U.S. enterprise
Large U.S.-based companies often prefer to do business with a U.S. entity. And if they’re large enough, they can even require it. One reason is that they can more easily enforce contracts with other U.S. entities.
Forming a U.S. entity also makes it easier to get paid by U.S.-based companies. U.S. companies are required to collect W8BEN forms from foreign vendors, which is just another paperwork hurdle. Many small businesses don’t comply with this rule, but large businesses are much more likely to do so. Due to regulations on foreign payments from U.S. firms, you may be subjected to withholding. Come to the U.S. and you potentially eliminate this hassle.
Increased access to U.S. capital markets or a U.S. exit
U.S.-based investors generally want to finance a domestic entity. Their goal (and perhaps yours, too) is to “go public” in the U.S. or get acquired by a U.S. company. Venture capital, private equity and others will almost certainly require a company to be based in the U.S.
That said, the prevailing wisdom is evolving thanks to a major tax change that took effect in 2018. In the past, U.S. investors were looking for U.S.-based “top entities.” After 2018, if a U.S. entity owns a foreign entity that is the result of a “flip up,” the U.S. entity will pay tax on the income of the foreign entity – even if no dividends are paid by that entity. While GILTI (Global Intangible Low-Taxed Income) does allow for a reduced tax rate to be used by the top entity and any taxes paid by that entity in their home country to offset the U.S. taxes, it’s now much more expensive to execute a flip up. Considerations related to flip ups should be carefully reviewed. For more information read Lower FDII Tax Rate Lures Foreign IP and Services Back to U.S.
3. Setting up your United States company
Thankfully, U.S. citizenship and/or residency are not necessary to incorporate in the United States. That means the process is pretty much the same for you as anyone else inside the country. But before going to the legal and administrative hassle of setting up a U.S. entity, make sure you actually need one.
3.1 When you need to set up a U.S. entity
You will need to set up a U.S. entity if you plan to have a physical presence in the U.S. Here are some examples of what constitutes a physical presence:
Owning inventory. If you send inventory to be warehoused in the U.S. and you still own it, you have a physical presence in the U.S. Using Fulfillment by Amazon (FBA) counts as a physical presence. Sellers who use Amazon FBA are required to collect and remit sales tax in all the states where their inventory is stored by Amazon, which could be any state where there is an Amazon Fulfillment Center. At the time of writing, Avalara lists 27 states where Amazon has warehouses.
Hiring employees. If you plan on hiring or are currently paying independent contractors, be careful. The IRS is cracking down on companies that improperly classify workers as independent contractors instead of employees. If you use independent contractors who get reclassified by the IRS as employees, your U.S. entity will be subject to substantial penalties and interest for nonpayment of payroll taxes. If you did not set up a U.S. entity, the IRS might determine that you have a tax filing requirement due to your physical presence in the U.S., and you may be liable for penalties and interest for not filing and paying income tax. If you’re not sure how to classify your worker(s), review the IRS page Independent Contractor (Self-Employed) or Employee? and consult with a tax advisor.
Leasing an office. Setting up an office with a physical address qualifies, even if you are rarely in it.
Paying vendors and regulatory bodies. At some point, you will need to either write a check or connect your bank account to pay vendors, state taxes and fees. Whether or not you are U.S.-based entity will impact how you do this.
3.2 When you don’t need to set up a U.S. entity
You might not need to set up a U.S. entity if:
- You don’t need an EIN (Employee Identification Number)
- You don’t need a U.S. bank account
- You don't plan on having a physical presence, i.e., you're just exporting goods from your country to the U.S. or dropshipping goods from another country to U.S customers.
Make this decision carefully and under the advice of a tax advisor. If you inadvertently develop a U.S. presence at some point, you may open your foreign corporation to U.S. reporting requirements. The safest course is to carefully review your U.S. activities and consider creating a U.S. entity. The rules regarding physical presence are complicated and can change quickly.
3.3 What entity type to choose
The most common U.S. business entities are:
- sole proprietorship
- limited liability company
- joint venture
New business entities are created under the laws of one of the 50 states or the District of Columbia. For the most part, business formation in the U.S. is not difficult. Businesses can be created without regard to the citizenship or residency of the owners of the business. For a more in-depth look at the various business structures, visit Aprio.com for Morison KSi’s “Doing Business in the United States Guide.”
Primary considerations when selecting a corporate structure include:
- the availability of limited liability protection for owners
- the costs of establishing and maintaining the particular vehicle for carrying on business
- management and control issues
- ease with which ownership can be transferred
- capital and credit requirements
- commercial and/or regulatory requirements
- tax considerations
Other important concepts to consider include pass-through or flow-through entities and personal income taxes. Pass-through business income is taxed on the business owners’ personal tax returns. The entity type dictates how the business income is taxed.
Here’s a quick review of your options:
Sole proprietorships are generally only appropriate for smaller business enterprises. The sole proprietor is taxed on the income of the sole proprietorship and is personally liable for the debts and obligations of the business.
Partnerships are formed by agreement between two or more partners. Partnerships, like limited liability companies, are “flow-through” or “fiscally transparent” entities for U.S. federal income tax purposes, meaning the owners are individually taxed on the business income. Limited liability partnerships are often used in professions such as legal and accounting practices. All partners in a general partnership are personally liable for the debts and obligations of the partnership, whereas the legal liability of a limited partner is generally limited to the amount of the limited partner’s capital account with the partnership.
Limited liability companies
A very common entity type, the LLC, is favored for its flexible management structure and relatively low maintenance administration. LLCs can elect to be taxed as a partnership or a corporation. And in certain cases, LLCs can be treated as “disregarded entities” if there is a sole owner. A disregarded entity is a legal entity that does not have to file a separate tax return, thus it is “disregarded” for tax purposes.
Being taxed as a partnership means that the owners avoid double taxation. But, if you are a foreign owner of a pass-through that is making money, each partner will need to obtain an ITIN (Individual Taxpayer Identification Number), and any income showing on the K-1 (used for reporting the distributive share of a partnership income) will require withholding of 15-30 percent.
One downside of an LLC is that it can be more difficult to raise capital since the sale of additional interests is subject to operating agreement restrictions. For that reason, we rarely see foreign-owned LLCs treated as partnerships.
A joint venture can be organized through a corporation, partnership or limited liability company and is typically organized for a specific purpose or project. The joint venture agreement generally covers issues such as the joint contributions of property or services, the purpose and duration of the joint venture, the formula for sharing profits and losses and the transferability of ownership interests.
There are no formal federal requirements for a foreign person to establish a branch in the U.S. That said, U.S. branches of foreign business enterprises may be required to obtain certain permits to conduct certain types of business operations in particular localities. A branch may also have to register with the states in which it does business and obtain a federal tax identification number.
Under certain conditions, corporations can elect to be treated as “flow-through” or “fiscally transparent” entities for federal income tax purposes. Such corporations are referred to as “S” corporations. If you are a foreign-owned company, you can immediately cross S corporation off your list since the owners must all be U.S. citizens or residents, and they can’t be other corporations. Therefore, an S corporation can’t serve as a subsidiary of a foreign corporation.
If you incorporate, you will most likely be taxed as a “C” corp by the IRS. C corporations are more complex to maintain but are preferred by outside investors because they allow owners to hold different classes of stock, such as preferred and common stock. If you plan to seek investors or go for an IPO (Initial Public Offering), you should form a C corp.
Consult with an expert before choosing an entity type. We have seen many U.S entities formed incorrectly or without consideration for unintended income tax consequences. The last thing you want is to accidentally make a non-U.S. citizen/resident subject to U.S. personal income taxes.
3.4 Where to incorporate
Incorporation in the U.S. is done at the state level. While you can choose from any of the 50 states, one state stands out: Delaware. More than half of all publicly-traded companies in the United States and 64 percent of the Fortune 500 are Delaware corporations [Deleware.gov]. Close to 100 percent of Aprio’s international clients organize in Delaware.
Delaware is popular for a variety of reasons: It offers a solid body of written and case law, specialized courts for business, an efficient Division of Corporations, and the fact that most prominent companies already are formed there.
Forming a Delaware LLC and treating it as a C Corp is the norm, and won’t raise any eyebrows. For anyone seeking investment, this is a good thing. In fact, many investors will require you to be structured as such.
While there are some reasons to choose a different state, the vast majority of foreign businesses will want to set up a Delaware LLC as its U.S. legal entity and then make an election to treat for tax purposes as a C Corporation.
3.5 How to form your new business entity
There are four ways to set up your new entity:
- Hire a qualified U.S. attorney
- Use an incorporation service
- Do it yourself (not recommended)
- Use Aprio Cloud
We highly recommend seeking the guidance of an experienced advisor before forming your U.S. entity. Every business is different, and a good advisor will ask the right questions to determine exactly what will benefit you now and in the future. Your accountant or tax advisor should work closely with you and/or your attorney so that all tax considerations can be addressed and resolved.
Aprio Cloud can set up your U.S. entity, along with providing the necessary tax consulting and follow-through to assist with financial and back-office arrangements.
3.5.1 Obtain a Registered Agent
Delaware law requires that every business entity maintain a Registered Agent who resides in the state and has a physical street address. A Registered Agent is a business or individual designated to receive service of process (SOP) when a business entity is a party in a legal action such as a lawsuit or summons. All states are going to require a registered agent, and most of the formation services will offer both the formation and registered agent services in one package.
3.5.2 Reserve your entity name (optional)
While not required, it is a good idea to reserve your entity name before your application is approved, just in case the name is already taken. For $75 you can reserve your entity name online here:
3.5.3 File your Certificate of Incorporation / Formation Forms
The Certificate of Incorporation is a one page document that must be either mailed or faxed — it can’t be submitted online. PDF fillable forms are available online here. A cover sheet is required and can be accessed here.
3.5.4 Order a Certificate of Status or Certificate of Good Standing
The Delaware Certificate of Good Standing is a letter provided by the Secretary of State that declares a corporation is in good standing. You’ll typically need one to open a corporate bank account, obtain a loan, and conduct other official business. Usually, these forms are good for, at most, 60 days from the date of issuance.
You can order a Certificate of Status or Certificate of Good Standing by submitting a request in writing. The fee is $50. The Secretary of State has provided a template with instructions here.
For more information, visit this page: https://corp.delaware.gov/directweb/
3.5.5 Stay compliant by filing your Annual Report and paying franchise tax
All corporations are required to file an Annual Report and pay the Delaware franchise tax by March 1 of every year. The Annual Report filing fee is $50. The minimum franchise tax is $175. For more details, see Franchise Taxes on the Division of Revenue website.
While this also can be done on your own, we recommend you hire a professional to assist. That is especially true if you have a complicated legal structure that includes different classes of stock.
3.6 Register your new corporation with the IRS
You can apply online for an EIN (an employer identification number assigned by the IRS). Due to recent changes in the law, the online application must include an individual with a valid Taxpayer Identification Number (SSN or ITIN). The individual must also be a “responsible party,” which is someone who controls, manages, or directs the applicant entity and the disposition of its funds and assets (e.g.: an officer, director, owner, general partner or trustor). Nominees are not authorized by the IRS to obtain EINs. For those applicants who have responsible parties without an SSN or ITIN, there are still ways to apply for an EIN, we recommend talking to your advisor in this situation.
3.7 Register as a foreign corporation in the state where you are doing business
No matter where you incorporate, you’ll also need to register your corporation in any state where you are doing business. For example, if you form a Delaware corporation, but plan to have your office in San Francisco, you’ll need to register as a foreign corporation with the California Secretary of State and pay the appropriate filing and annual fees. If you are not familiar with the rules and regulations, we recommend you get assistance from an attorney or tax advisor.
3.8 Register your corporation at the local level
You might also need to register your corporation at the local level. For example, anyone engaged in business within the City of Los Angeles is required to obtain a Tax Registration Certificate (TRC) and pay the required business tax. Find out about similar local government requirements in all jurisdictions where you have a physical presence. Some local jurisdictions collect payroll taxes, which are addressed in an upcoming section on payroll tax.
The type of company and whether it has employees will also dictate the types of registrations required by various states to hire employees and collect and remit sales tax.
3.9 Consider intellectual property
If your business involves valuable intellectual property, you should consult an IP attorney with international expertise before establishing a U.S. presence.
4. Financial Solutions
The U.S. has one of the most complex tax systems in the world. Income taxes are imposed by the federal government and by most states. In addition, certain cities and localities can impose an income tax. The U.S. system is a “pay as you go” system. U.S. federal tax law requires employers to withhold and remit income taxes and Social Security taxes from the wages of employees, and corporations are required to pay income taxes on a quarterly basis.
As a general rule, persons (individuals and corporations) that are residents of the U.S. are subject to federal income tax on their worldwide income. Nonresidents, on the other hand, are subject to U.S. federal income tax only on their U.S.-source income. U.S. residents who pay foreign income tax on income earned outside the U.S. are generally entitled to claim relief in the form of a foreign tax credit or deduction for such foreign income taxes paid. In most cases, it is more advantageous to claim a credit rather than a deduction for foreign income taxes paid on foreign-source income.
A number of other taxes are currently imposed at the federal level, including the estate tax, the gift tax, the generation-skipping transfer tax and Social Security taxes. The U.S. does not currently impose a value-added tax at the federal level, but there has been increased discussion in recent years regarding the creation of a federal value-added tax. For a deeper dive into the U.S. taxation system, visit Aprio.com for Morison KSi’s “Doing Business in the United States Guide.”
You may find you need a U.S. bank account, but there are lots of other options to pay and receive money these days. U.S. bank requirements are generally strict and can vary widely for corporations with foreign shareholders. You may be required to show up in person at the bank branch to provide a “wet signature.” Some banks require all the officers and directors to be present. Others require a physical address (no P.O. Boxes or virtual address services such as Earth Class Mail). Additionally, some banks may require you to maintain minimum balances for specified periods of time or only work with corporations in certain industries. Ask about their requirements before you begin the process of opening your accounts.
4.2 FATCA & FBAR reporting
Pursuant to the provisions of the Foreign Account Tax Compliance Act (FATCA), foreign financial institutions (FFIs) — including foreign banks, brokers, insurance companies and investment funds — must disclose to the IRS certain information about accounts owned by U.S. persons.
FATCA also requires certain U.S. taxpayers holding foreign financial assets with an aggregate value that exceeds certain thresholds to report information about those assets. Furthermore, “U.S. persons” may be required to file Treasury Department Form FinCEN 114 (Foreign Bank Account Report or “FBAR”).
Aprio Cloud has relationships with banks and can ease the burden of opening and managing your bank account from abroad.
4.3 Transfer pricing
U.S. transfer pricing rules are designed to ensure that transactions entered into between related parties that have business operations in different countries are not used to artificially allocate profits to lower tax jurisdictions and deductions to higher tax jurisdictions.
The overriding principle of U.S. transfer pricing rules is that transactions between related parties should reflect “arm’s-length” terms (i.e., as if the related parties were independent, unrelated parties).
U.S. transfer pricing rules apply to related party transactions involving goods and services, including intercompany purchases between related parties, loans between related parties and the payment of management fees from one related party to another. There are alternative methods for determining whether a particular transaction between related parties reflects “arm’s-length” terms. For more on transfer pricing rules, visit Aprio.com for Morison KSi’s “Doing Business in the United States Guide.”
5. Set up your U.S. “back office”
Since many of your key personnel will likely not be based in the United States, cloud applications allow you to connect and manage U.S-based back-office functions from anywhere.
5.1 Select a U.S. accountant or bookkeeper
When choosing an accountant or bookkeeper in the U.S., you'll need to decide what sort of relationship you're looking for. Accountants here provide a wide range of services. Some only do taxes. Some do both taxes and advisory (Virtual CFO) services but don’t offer bookkeeping. Some firms, such as Aprio, provide a full-service solution that encompasses everything from bookkeeping to tax to advisory — and even insurance services. Whatever you choose, do not attempt to complete and file your U.S. income taxes yourself. Hire a professional.
5.2 Set up your cloud accounting software
At Aprio Cloud, we love Xero for international clients because it is built from the ground up for global business. Many global small businesses already use Xero, so it’s easy for the U.S. subsidiary to copy and adapt the existing chart of accounts of the parent company.
We recommend retaining the assistance of a U.S. accountant in setting up your Xero file. For intrepid do-it-yourselfers, here’s what you’ll need to get started:
- Legal name of your organization: See your state incorporation documents.
- Financial year-end for your organization: By default, this is the calendar year, but you can also elect a different tax year start date. Consult with your tax advisor for more on this.
- Tax settings for filing returns for your organization: This includes your Tax ID number (EIN) from the IRS. If you are responsible for collecting sales tax, you’ll also need to know how often and whether you’re a cash or accrual-basis taxpayer.
- Email address of your accountant or bookkeeper: You’ll need this to invite your advisor to access your organization.
- Logo, payment terms and a starting point for your invoice/credit note numbering sequence
- Your chart of accounts or a list of categories for organizing your accounts: We recommend using the same categories and numbering system as the parent company, if possible. (e.g., Rent, Stationery, Sales) Then make any changes needed for accounting unique to the United States. With Xero, you can easily export your existing parent company chart of accounts into the subsidiary company file.
- Bank and credit card account numbers for accounts you want to set up in Xero: You should have these already if you’ve set up your U.S. bank accounts.
- Conversion date: This will be the first day of the first fiscal year for your new entity.
- Sales tax rates: If you are going to be charging sales tax, you’ll need to know the proper rates to charge. Avalara's Free Sales Tax Rate Map is a good place to start.
- Account balances: These should all be zero if you’re setting up Xero from the beginning of your new company.
- Outstanding invoices, bills, credit notes and uncleared funds: Again, you shouldn’t have any of these to enter if you’re setting up Xero for a new company.
Xero has a detailed Getting Started Guide. However, we highly recommend you seek the assistance of a U.S. accountant in setting up your U.S. Xero file. Details such as sales tax and payroll settings are quite different than abroad, so make sure you start out on the right foot.
5.3 Set up your cloud accounting add-ons
We recommend two Xero add-ons to our global clients: Receipt Bank and Fathom Reporting. Many of our clients are already using these tools abroad, so it makes sense to continue using them for the U.S. entity.
5.3.1 Receipt Bank
Receipt Bank automates the entry of receipts and invoices into Xero. Receipt Bank makes it easy for our clients to submit documents to us from anywhere in the world via email, Dropbox and digital upload.
Receipt Bank saves time by automatically extracting the following information:
- Item Type (e.g., receipt, invoice, credit note, etc.)
- Invoice Number
- Sales Tax (e.g., GST, VAT, TVA, etc.)
- Payment method
This data is easily synced with Xero as transactions with the document image attached. Everything is now in Xero. That’s what we call “audit proofing.”
Jirav makes beautiful visual dashboards and reports. When both the parent and subsidiary are on Xero, U.S.-based accountants and your accountants back home can easily collaborate to produce a set of consolidated financials.
6. Hire your first employee
Setting up payroll presents a unique challenge for international businesses, mostly due to the complexities of health benefits for U.S. workers. When you first expand to the U.S., you may only need to hire one employee to start. But one employee doesn’t qualify as a “group” for most health benefit providers (and even some PEOs). That said, we do work with vendors who have options for benefits for one employee.
Consequently, you can set up payroll, but you may not be able to provide health benefits to your first employee until you hire your second employee. For many companies, that’s not ideal. For this reason, selecting the right payroll provider at the start is important. They can help you make decisions about growing your company and taking care of your employees. Later will we discuss how to choose a payroll provider or PEO.
6.1 Bringing a founder or others to the U.S.
Given the current climate, it can take months to receive a visa to be able to legally work in the U.S. At the same time, there have been more crackdowns on white-collar workers working in the U.S. without a proper visa. This type of activity is criminal and not recommended. Thus, careful planning is required.
6.2 Types of visas
The type of visa you must obtain is defined by U.S. immigration law and correlates to the purpose of your travel. While there are about 185 different types of visas, there are two main categories of U.S. visas:
- Non-immigrant visa for travel to U.S. for temporary visits such as for tourism, business, work or study.
- Immigrant visa for people who intend to live permanently and immigrate to the U.S.
6.3 Business focused visas
- B-1 and B-2 Visas: The most common non-immigrant visa is the multiple-purpose B-1/B-2 visa, also known as the “visa for temporary visitors for business or pleasure.” Visa applicants sometimes receive either a B-1 (temporary visitor for business) or a B-2 (temporary visitor for pleasure) visa if their reason for travel is specific enough that the consular officer does not feel they qualify for combined B-1/B-2 status.
- E Visa: Treaty Trader (E-1 visa) and Treaty Investor (E-2 visa) visas are issued to citizens of countries that have signed treaties of commerce and navigation with the U.S. They are issued to individuals working in businesses engaged in substantial international trade or to investors (and their employees) who have made a “substantial investment” in a business in the U.S. The variant visa, issued only to citizens of Australia, is the E-3 visa (E-3D visa is issued to spouse or child of E-3 visa holder and E-3R to a returning E-3 holder).
- Temporary H Visas: H visas are issued to temporary workers in the U.S. Categories include:
- H-1B1 visa: Professionals who come temporarily to the U.S. to perform a specialty occupation.
- H-1B2 visa: Individuals who come temporarily to the U.S. to perform cooperative research and development projects.
- H-1B3 visa: Individuals who come temporarily to the U.S. as a fashion model.
- H-2A visa: Individuals who come to the U.S. to perform agricultural labor or services of temporary or seasonal nature.
- H-2B visa: Individuals who come to the U.S. not to perform agricultural labor or services but to perform work in temporary nature.
- H-2R Visa: Special type of H-2B visa which was temporarily provided as a way to bypass the quotas for the H-2B for individuals who had been previously issued H-2B status (enacted in the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Tsunami Relief, 2005, P.L. 109-13, 119 Stat. 231, signed into law by the President on May 11, 2005).
- H-3 visa: Individuals who come to the U.S. to participate in a training program.
- H-4 visa: Spouses and children under the age of 21.
For more on labor certification requirements of various visa’s, visit Aprio.com for Morison KSi’s “Doing Business in the United States Guide.” Visit the official website for the Department of Homeland Security for the most current information and a complete list of possible visas.
Taxation on employee earnings and benefits (e.g., housing, cars, gym memberships, etc.) is different in the U.S. versus other countries. Once an employee realizes how much more they will be paying in taxes in the U.S., they may think twice before leaving their home country unless you can make it financially worth their while. Before you determine a salary for anyone considering a move to the U.S., discuss your plans and ask your advisor for a rough determination of their total taxes and take-home pay.
6.4 Determine independent contractor vs. employee
It’s important to determine ahead of time if the person you’re hiring should be treated as an employee or an independent contractor. Paying independent contractors provides significant benefits to the business, but can also result in serious legal and tax problems if the contractor is later found by federal and/or state agencies to be an employee.
It’s often advantageous for a business to pay workers as contractors because the business does not have to make payroll deductions, pay withholdings, or pay the employer share of Social Security and Medicare (FICA). As of 2019, the employer share of FICA is 7.65 percent of the first $132,900 of earnings. The wage base limit typically changes every year.
Often, the independent contractor vs. employee determination is clear and easy to make. For example, the attorney who you engage to prepare your incorporation documents is clearly a contractor, not an employee. But what about a bookkeeper who comes to your office three days a week? This person could be paid as a part-time employee or as a contractor who is doing the same type of work for different employers. Many online resources exist to help make this determination, but keep in mind that the IRS and/or states are on the lookout for improper employment practices.
If there is potential for confusion, the safest approach is to pay your worker as an employee. You may also decide to complete an SS-8 form and submit the details to the IRS for a decision. When developing independent contractor agreements, it is always advisable to seek legal consultation. There is a new independent contractor definition under the “ABC Rule,” which is in effect in California, Massachusetts and New Jersey. Other states are reviewing a possible change. The ABC Rule makes it very clear that in order to hire a contractor, this person must NOT be performing duties that are performed by other employees as a regular part of your normal business activities. If your company designs websites as a normal business activity and you need extra help due to a busy time, the ABC rule would mean you would have to hire someone as an employee and not an independent contractor. You could hire that person as a temporary employee or part-time, but they would be an employee not a contractor per the ABC Rule.
6.5 Select a payroll provider for one employee
You may only need to hire one employee to start. Because one employee doesn’t always qualify as a “group” for many payroll providers, you may be limited in your options if you want to provide health benefits to that employee. If you fall into this category, we recommend exploring payroll providers TriNet and Gusto.
6.6 Select a payroll provider for two or more employees
If you will have two or more employees to start, you have many options. The decision of which provider to choose is complicated by the fact that some payroll providers offer health benefits as well. You can also “mix and match” payroll providers with benefits providers. We suggest considering the following:
Like the big payroll players (Paychex and ADP), Gusto automatically calculates, impounds and remits payroll taxes to the proper authorities. But unlike those providers, Gusto is completely online and easy to use. It also syncs seamlessly with Xero to send in the necessary accounting entries after each payroll.
In 2015, Gusto began offering integrated health benefits and workers’ compensation insurance alongside payroll. Gusto has now partnered with a broker who can offer coverage in most of the 50 states across multiple industries. If you have questions regarding a specific state, please reach out for guidance.
A PEO (Professional Employer Organization)
A major benefit of using a PEO is less time spent on compliance because they handle everything for you. The downside is that some PEOs can be expensive and difficult to get out of.
Here are a few PEOs that we use for Aprio Cloud clients:
Big payroll providers such as ADP and Paychex also offer PEO-type products. Many PEOs charge a percentage of each payroll. It is less expensive for employers to work with PEOs that allow a flat monthly charge so you can run as many payrolls as you would like for the same cost. It’s easier to budget expenses if you can control the cost through a standard monthly rate.
6.7 Register for payroll withholding & taxes
Each state has its own requirements for what payroll registrations you will need. In some states, hiring an employee creates "nexus" (physical presence) and will require additional registrations in addition to the payroll withholding and unemployment accounts. Nexus is discussed further below under sales tax. Some states consider hiring employees to be transacting business in the state and will require state registration. It is a good idea to consult with your attorney and tax advisor to ensure you are properly registered in the necessary state and local municipalities. If you choose a PEO, your organization will not have to register payroll accounts as those will be under the PEO umbrella for your company.
6.7.1 Set up your federal payroll tax account
Register with the IRS using EFTPS (the Electronic Federal Payment System) to pay:
- Income tax withholding
- FICA payroll tax
- Social security
- FUTA payroll tax (Federal Unemployment Tax Act)
To enroll, you’ll need the following:
- EIN (Employer Identification Number)
- Legal business name
- U.S. phone number
- International phone number
- Business address
- Bank account routing and account number
6.7.2 U.S. federal income taxation of non-U.S. citizens
Enforcement of so-called "white collar" visa and tax noncompliance has increased in recent years, so foreign workers should consult an immigration attorney regularly to maintain your work and tax status. If you have an outstanding tax liability with the IRS, the U.S. government can hold your passport or worse.
For U.S. federal income tax purposes, an “alien” is an individual who is not a U.S. citizen. As a general rule, “resident aliens” are subject to U.S. federal income tax on their worldwide income, the same as U.S. citizens.
In contrast, “non-resident aliens” are generally subject to U.S. federal income tax only on their U.S. source income and certain income connected with the conduct of a trade or business in the U.S. Aliens are treated as non-resident aliens for U.S. federal income tax purposes unless: 1) They are “lawful permanent residents” of the U.S. (i.e. holders of an “alien registration card” also known as a “green card”); or 2) They meet the “substantial presence test,” which is based on the number of days an individual is physically present in the U.S. during the tax year.
Therefore, a non-citizen and non-green card holder will be treated as a resident alien for U.S. federal income tax purposes only if he or she meets the substantial presence test. However, even if the individual meets the substantial presence test, he or she will be treated as a non-resident alien if he or she meets what’s called the “closer connection test.”
Under certain conditions, income earned by certain non-resident aliens may be exempt from U.S. federal income tax by application of the particular provisions of an income tax treaty entered into between the U.S. and the individual’s country of residence.
For more taxation of non-U.S. citizens, visit Aprio.com for Morison KSi’s “Doing Business in the United States Guide.”
6.7.3 Set up local payroll tax accounts
You’ll need to register with any state where you have employees living or working. We’ll use California as an example because so many foreign startups open their first U.S. office in San Francisco or Los Angeles. Note that your payroll provider may handle this for you, or this is something that Aprio Cloud can also manage for you.
Each state has different agencies and a different registration process. As you determine where to hire your employees, we suggest consulting with a professional.
In California, for example, you’ll need to register with the EDD (Employment Development Department) for:
- California Income Tax Withholding
- Unemployment Insurance
- Employment Training Tax
- State Disability Insurance (SDI)
6.7.4 Set up local payroll tax accounts
For example, the city of San Francisco collects a Payroll Expense Tax. All businesses with a taxable San Francisco payroll expense greater than $300,000 must file a Payroll Expense Tax Statement for their business annually by the last day of February for the prior calendar year (Jan. 1st - Dec. 31st).
7. Obtain workers’ compensation insurance
In most states, companies are required to carry workers’ compensation insurance. Workers' compensation insurance protects your business against claims for injuries, death and illness that occur as a direct result of the work done while your employees are on the job.
The easiest way to manage a workers’ compensation insurance policy is to purchase it through your payroll provider. Gusto partners with AP Intego to offer “pay-as-you-go” insurance.
Pay-as-you-go insurance is preferable because insurance premiums are deducted throughout the year based on actual payroll. Under the traditional annual method, you pay a premium amount up front based on an estimated payroll for the whole year. At the end of the policy, the employer must file paperwork to reconcile the difference between the estimated and actual payroll amounts.
Pay-as-you-go insurance eliminates this hassle. All workers’ compensation policies do an annual (year-end) audit to reconcile premiums. However, the pay-as-you-go option keeps your workers’ compensation premiums up to date with new and terminated employees throughout the year, usually eliminating underpayment or overpayment of premiums.
8. Set up employee health benefits
Employers from other countries are often surprised to learn that the United States relies extensively on employer-provided insurance. Fifty-six percent of the United States population gets its health insurance through their employer (Source: U.S. Census).
If you do not provide health benefits, your employees may be forced to purchase insurance themselves, likely on one of the health exchanges set up under the Patient Protection and Affordable Care Act (ACA, known colloquially as "Obamacare"). Depending on your industry, this may put you at a significant disadvantage when recruiting new talent.
If you determine that paying for premiums is the best option for your company, we strongly suggest doing this through a Health Reimbursement Plan such as Peoplekeep, which can help keep your company compliant with regulations.
8.1 Choose a health benefits provider
You can use Gusto for health benefits, which is easy if you’re already using Gusto for payroll.
9. Establish credit in the U.S.
Now that you’ve set up your U.S. business, you’ll probably want to start building a credit history. As a foreigner, the first step is to obtain a Social Security Number. Credit reporting agencies use SSNs as their primary identifier, so it is impossible to build credit without one.
To get an SSN as a non-immigrant, you’ll first need papers from the Department of Homeland Security showing your U.S. immigration status and authorization to work in the United States. Then you can apply for a Social Security Number by visiting a Social Security office with a completed Form SS-5. The Social Security Administration recommends waiting 10 days after arriving in the U.S. to make it easier for them to verify your DHS documents online.
Once you’ve obtained your SSN, check with your bank to see if they will give you a secured loan or secured credit card. With a secured loan, you put money in a deposit account as collateral. Secured credit cards work similarly.
If you have a family member already in the United States, your relative can cosign a new loan or credit card. Your cosigner will be liable for any debt if you don’t pay, but you will start building a credit history right away.
Once you’ve obtained a loan or credit card, you must use your credit and pay the bills on-time every month to build a credit history. Over time, you’ll establish a history of positive payments, which will lead to a good credit score. Just know that it won’t happen overnight.
The value of a good credit history cannot be overstated. Many of our clients come to the U.S. without credit and can’t even lease a vehicle. Alternatives to traditional credit cards include Veem and Brex, and new players are coming into the market all the time.
10. Collect and remit sales tax
To say that sales tax in the United States is complicated is a major understatement. In 2017, the Tax Foundation counted nearly 10,814 U.S. sales tax jurisdictions. Knowing when to collect sales tax and how much to collect is a big problem for many sellers in the United States, particularly online sellers.
The variety of rates was recently complicated by the fact that the U.S. Supreme Court decided in favor of South Dakota in the Wayfair case.
10.1 When to collect sales tax
The key to knowing where and when to collect sales tax is referred to as “nexus.” If you have a sales tax nexus in a state, then you must collect sales tax from all customers in that state (for taxable items).
Different states have somewhat different definitions of nexus, but usually "physical presence" is enough to trigger nexus. Having an office, employee, warehouse, affiliate, or inventory in a state usually counts as a physical presence. If you think you might have a physical presence in a state, you should consult with a tax advisor and/or that state's tax authority to find out for sure. As mentioned above, Wayfair changed what creates nexus. Keep it simple and reference an existing document.
Different states and taxing authorities require sales tax compliance on different things. For example, professional services or SaaS products maybe be taxable in some places, but not in others.
For more information on nexus, read the following articles on Aprio.com:
- International Companies Face a Tangled Web of Tax Rules
- States can now force retailers without a physical presence to collect sales tax, Supreme Court says
10.2 How much sales tax to collect
Thanks to online accounting tools, it’s easy to find out how much sales tax to collect for a given address. Just head over to Avalara Sales Tax and enter the address.
The tricky part is knowing which address to use. Some states are “origin-based.” This means that you charge the amount of tax at your own business location regardless of where you ship taxable items in that state. Other states are “destination-based.”
When you have nexus in a destination-based state, you must calculate the sales tax rate based on where your buyer is located. Additionally, some states require different rates depending on whether it is your home state or whether you are a “remote seller.”
11. Explore tax incentives
The federal government provides certain income tax incentives to both domestic and foreign businesses that carry on a trade or business in the U.S. Three of the more significant federal tax incentives are:
- The credit for increased research expenditures; and
- The work opportunity credit
For the purposes of this guide, we will only discuss R&D tax credits, which may allow you to recoup the costs of your R&D and re-invest in your business. Any company that designs, develops or improves products, processes, techniques, formulas or software may be eligible. R&D relates to development before commercial production for related U.S. activities.
The R&D Tax Credit results in an immediate benefit to a company since it can reduce past, current and future years’ federal tax liability, thereby creating a ready source of cash. The credit provides a dollar-for-dollar offset against taxes owed or paid, which differs from a deduction. Starting in the 2016 tax year, the credit can be used to offset Alternative Minimum Tax and payroll withholding in certain circumstances.
12. File your 1099s
The IRS requires companies to file a 1099 form for each contractor who earned at least $600 during the tax year. You’ll need the contractor's mailing address and Social Security Number or Employer Identification Number (EIN) – information they provide on a W-9 form. It's best to have contractors complete a W-9s when you hire them.
The deadline to send 1099s to your contractors is Jan. 31 each year. The deadline for filing your 1099s with the IRS used to be Feb. 28, but in a recent attempt to crack down on noncompliance, they moved the due date up to the Jan. 21.
If you’re a client of Aprio Cloud, we can prepare and file 1099s on your behalf. If you’re looking to do it yourself, we recommend using Tax1099.
12.1 Penalties for not filing 1099s
For each 1099 form that you don't file, the IRS can charge you a penalty fee equal to 10 percent of the unreported amount or $250, whichever is greater. As if that isn't bad enough, the state of California can also disallow the entire income tax deduction you may have claimed. When you file your business taxes, the IRS will ask if you were required to file 1099s and if they were filed. Answering this incorrectly may constitute fraud.
13. Pay your corporate taxes
Here’s a list of the various filing requirements due to federal and state authorities for a Delaware C Corporation that is foreign-owned and operating in California with a Dec. 31 fiscal year end:
- March 1: Delaware Annual Report and Franchise Tax [file and pay online]
- April 15: IRS Form 1120, U.S. Corporation Income Tax Return.
- April 15: IRS Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.
- April 15: California Form 100, California Corporation Franchise or Income Tax Return
- April 15: IRS Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations
14. Stay compliant with personal taxes and filings
Every citizen of the United States knows April 15 as well as their own birthday. It’s the deadline for filing personal taxes.
If you receive a U.S. W-2 or have spent more than 183 days in the U.S. over the last three years, you are required to file an individual income tax return to the IRS and your state and/or city of residence. If you bring an employee from your country to the U.S., and they have spent time here launching your business, they may have a filing requirement, even if they are paid by the foreign entity.
Note that non-residents are allowed an extra two months with a June 15 deadline.
14.1 Information report of your foreign assets
Deadline: Oct. 15
If you and/or your U.S. company have any assets outside the U.S. or signatory authority over a foreign bank account you are required to file a FinCen form by Oct. 15 each year. There is no tax due on these assets, but the U.S. will want to know descriptions and amounts. The full line item instructions are located at FBAR Line Item Instructions.
15. Stay compliant with other local taxes
Local jurisdictions may collect additional taxes. For example, the City of Los Angeles imposes a tax on gross receipts for any person conducting any business within city limits. Don’t forget to register with any local jurisdictions that require it, and remit the appropriate taxes.
If you’re interested in talking to Aprio Cloud, you can schedule a complimentary consultation. Aprio Cloud offers all-inclusive packages to get you started in the United States with an accounting team that will support you as you grow.