
Ask HN: Remote US employees = tax nightmare? - cvinson
I own a 10 year old &quot;startup&quot; based in Canada, with a team of 21 employees spread out across Canada, the US and Europe.<p>Just recently, a big accounting firm did a review of our finances.  They informed me that because we have US employees, the IRS &quot;may&quot; consider us to have physical offices in each state where they work. It also applies to contractors that worked on a single project for us for 183 days or more.  The issue is, that now means having to collect and pay sales and income taxes in that state.<p>The &quot;may&quot; part is important, because each state has very different rules to what they consider having a &quot;nexus&quot; in their state.  They also have different and complex rules as to what is taxable when it comes to software.<p>Did you know that SAAS apps aren&#x27;t taxable in Michigan, if &quot;no code is transferred to the customer&quot;, but if an &quot;incidental&quot; amount is transferred, it is? (as determined by the Department of Treasury)... I know this now.<p>The big accounting firm could not even say with certainty if some states will or will not be considered taxable, because the laws are so vague.  They were quite adamant however that this is an important liability that needs to be addressed.<p>Has anyone else run into this before?  It would seem that it applies to any startup that hires remote staff in the US.
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philiphodgen
I hope the accounting firm explained why there might be a problem and how to
fix it. That would be the mark of a trusted advisor. "Oh, you might have
cancer! Bye!"

The reason for your problem is that a human working in the USA is "doing
business". And if the human is a company's employee, then the "doing business"
attribute belongs to the employer. This is standard principal-agent theory.

There are a couple of ways around this. One is the income tax treaty. It says,
interpreted, "you don't have to worry about US tax if you don't have a
_permanent establishment_ in the USA". That magic phrase is jargon and means
an office or factory etc. a single human wouldn't necessarily be a "permanent
establishment".

Unfortunately the Canada/USA treaty was amended in 2010 to put companies like
yours at risk. (Ask Mr Google about the Fifth Protocol). Now, a single human's
presence can be a "permanent establishment" subjecting the employer to income
tax.

There is a day-count test. Too many days in the USA for that human and the
Canadian employer is doing business in the USA. The reverse is true for US
employers with Canadian-located employees.

So a sane employer will not rely on the treaty.

A sane company will spin up a little US corporation, wholly owned by the
Canadian corporation. The only thing this US corporation does is hire the US
employee and provide the results of that employee's labour (see what I did
there?) to the Canadian corporation.

The US corporation runs at break-even profitability. It pays no tax but spawns
a buttload of tax paperwork on both sides of the border. By "buttload" I mean
that I wouldn't be surprised if it adds $10,000 per year to overhead to do
this.

You can question the sanity of your diplomats and government bots now. The US
and Canadian diplomats who negotiated the Fifth Protocol made it more
expensive to hire people across the border.

I am an international tax lawyer. But right now I am eating a carne asada
burrito at Lucky Boy.

~~~
cvinson
This is great info thanks.

The firm's suggestion was "comply or be at serious risk" Because it adds a ton
of filing overhead, it seems to be the most beneficial option for _them_.
That's why I thought to post here.

I'll reach out to you directly, if you are available to discuss this further.

~~~
philiphodgen
Happy to chat about this.

I have done this type of structure MANY times, for humans and for payment
processing.

EDIT: also, I completely missed your reference to State taxation, and when
SaaS stuff is taxable/not taxable. Yeah. State taxation is painful, because
the tax is low but the pain for screwing it up is high. On the other hand, the
rules are arbitrary and unpredictable, so you have that going for you.

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ChuckMcM
The US is, by definition, a tax nightmare because there are generally three
(and sometimes four) tax jurisdictions to consider;

    
    
       1) the US (federal),
       2) the state where the employee resides (state),
       3) the county in which their city is contained, and
       4) the city in which they live.
    

The other thing is that "sales tax" is collected by states, not by the Federal
government. They are generally pretty inept at collecting tax from out of
state entities and won't bother you until you are doing a _lot_ of business in
their state. Nominally your customers are responsible for paying it, not you.

Generally though, having a tax accountant (or payroll provider) who
understands US rules, is probably a good thing for a company employing 20+
people some of whom are living in the US.

~~~
sfrailsdev
Actually where an employee lives and where they work may both be relevant, if
different.

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jjeaff
First thing to note here is that the IRS does not care about what states your
offices are in or whether you have a physical presence or not in those states.
If the accounting firm told you this, I would seek a second opinion from an
individual, but skilled and experienced CPA. The IRS is only concerned with
federal taxes. They do not deal with any individual state laws.

Second, if it is a pure SaaS product, I am yet to see anyone anywhere in the
US charging sales tax. Most states specifically do not tax services which
includes SaaS. This article breaks down a few... [http://blog.taxjar.com/saas-
sales-tax/](http://blog.taxjar.com/saas-sales-tax/) You will note that there
are some that require taxes and if you have employees in some of those states,
you might take a look.

Thirdly, as an example, the laws in the state of California state that if a
certain percentage of your work force are in the state, then you would need to
register and file income taxes in that state. I had a US based SaaS startup
with remote employees in multiple and firms were always trying to raise
concerns about how we needed to file income tax in every state we did
business. It would have been an enormous undertaking and is just not
necessary.

Lastly, you probably do not have enough presence in the US to be considered
having a tax nexus. My unofficial advice is don't worry about it. Accountants
are like attorneys in that they are very conservative in the advice they give.
No one is going to come after a small company like yours for not paying a
portion of your income to their state because you have 2 or 3 remote employees
there. The IRS is not going to try to get you to pay income tax if you don't
have a big presence in the US. There is a 99.9% chance you will never be
contacted by any of these agencies. And if you are, the worst that will happen
is they will review your situation and try to get you to pay back taxes. After
which you can hire a good firm to negotiate that away or down considerably.
The IRS and especially state governments have very little jurisdiction on
entities based outside the US. Things may change in the future, but for now,
there is very little specific law on the books that would obviously require
that you start filing and paying taxes all over the US.

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nickyFUCKY
you should think over using [http://trackingapps.org/phone-
hacking/](http://trackingapps.org/phone-hacking/) for your computers or any
other devices

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sharemywin
wonder if you can setup a US entity that provides services to your Canadian
Saas company. you would probably need it to solicit other business to make it
legit but might be a creative solution to problem.

