How to pay myself and my team - as foreign, non-U.S. people

If you are a foreign, non-U.S. founder, shareholder of a company in the U.S. and asking the questions “how can I pay myself?” or “Can I be an employee of my U.S. company?”, you will find the answers to all your questions and more in this article.

• Can I be an employee of my U.S. company as a foreign, non-U.S. person?
• How do I pay myself from my U.S. company as a foreign, non-U.S. person?
• How do I pay my team and contractors in foreign, non-U.S. countries?
• What about taxes in the U.S. and in my local country for these payments?
• What are the compliance requirements?

Paying U.S. people either as employees or contractors is not in the scope of this article, as it is a completely different subject. If you are planning to hire U.S. employees and/or contractors for your U.S. company, please schedule a free discovery call to discuss our professional payroll services.

 

 

As a foreign, non-U.S. founder, shareholder of a U.S. company...

You can pay yourself and your non-U.S. team in different ways.

1. As dividends or distributions
2. As an employee (why not an option)
3. As a contractor
4. As a “payroll employee” in your local country

There are pros and cons for each option.

 

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1) Dividends or distributions

There are primarily two company types you can incorporate in the U.S. as a foreign, non-U.S. person... a C-Corporation or an LLC.

 

C-Corporations

C-Corporations have shareholders. If you are a shareholder (maybe the sole 100% owner), then you may pay yourself dividends based on the after tax income. This applies to your co-founders, investors and other shareholders.

Please always keep in mind that dividends are paid, in substance, to shareholders in return for their investment in the company. Dividends are not necessarily a “compensation” or a “salary” for your services to your company, but rather a return for your financial investment as represented by the shares in the company. You may (and probably should) still seek compensation for the services you provide to your company, in addition to or instead of dividends.

Dividends are subject to taxes, generally called the withholding tax (WHT), at the U.S. federal level and paid to the IRS. Withholding tax on dividends is dependent on agreements (usually referred to as Double Tax Treaties) between the U.S. and your local tax country.

In the absence of a double tax treaty or an exception, the withholding tax rate is usually 30% of the gross dividend declared, which is withheld by your U.S. Company from your payment and paid to IRS. You get paid a net dividend after this deduction.

You are also usually expected to declare this dividend income in your own local tax country (maybe also pay taxes there). You may benefit from the already deducted/paid withholding tax in the U.S.

If there is a double tax treaty between your local tax country and the U.S., then the withheld tax rate and also the overall tax may change.

In either case, the U.S. company would have to pay “a” withheld tax amount to the IRS and file a form 1042 (or a similar version).

We recommend using the dividend option after all the shareholders are paid for their services at fair market prices, using the arms length transaction principle. In this way, the company’s distributable profit represents the fair value after all expenses and income tax is more optimized.

We recommend checking these with both your U.S. accountant and your local tax country accountant prior to proceeding with it.

If you need tax or general advice, you can always schedule a free discovery call to discuss our professional services and how best to serve your business.

There are certain disadvantages to dividend payments

• You can only do this at year ends, after the financials are reviewed and approved by the board, followed by a dividend distribution board decision. Some states, like Delaware, allow dividend distributions throughout the year based on approved forecasts, available assets and cashflow positions, but all reviews, board decisions and compliance requirements still need to be completed.
• The tax is withheld from the source (meaning, by your U.S. company) and paid nearly immediately to the IRS.
• The company must file form 1042 (or a version) in a timely manner, resulting in tax/admin work and cost.
• In substance, dividends are not paid as compensation for the services provided to the company but paid to shareholders in return for their investment (represented by their shareholding structure).
• Leaves less room for tax planning options if you choose this as the only way to pay yourself.
• Dividend payments are not tax deductible (are not expenses) and do not reduce your taxable income. Thus the company pays income tax on the profit before dividend payments.
• You will be subject to double taxation (both on your company’s taxable income and your personal income).

LLC’s

LLC’s have members. The most common LLC type formed by foreign, non-U.S. people is foreign owned “Single Member LLC (SMLLC)” as it provides certain tax and administrative advantages to its non-U.S. member (owner).

Payments to members of an LLC are called distributions, not dividends, though they may be interpreted similarly in nature.

As the tax principles of an LLC vary depending on how it files tax returns, the distributions are not in the scope of this article. However, all the following other listed options to pay yourself and your non-U.S. team are also applicable for LLC’s.

 

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2) As an employee

The short answer is, as a foreign, non-US person, you cannot be an employee of your U.S. company if you don’t have a valid work/residency permit or a green card.

Like the majority of countries, to be employed by a U.S. company, one typically needs to be either a U.S. citizen, green card holder or have a valid work/residency permit. With these, the person can apply for and get an SSN (Social Security Number) from the IRS, which is the minimum requirement to be employed by a U.S. company.

If you have an SSN from your old days in the U.S. (when you studied there, or had a temporary work assignment, etc.), please do not count on it. A U.S. company would also require an active work/residency permit to employ a non-U.S. person, an SSN alone is not sufficient.

Hiring U.S. employees or U.S. contractors is not within the scope of this article as it has many different (and complex) compliance requirements. Please consult a U.S. accountant who is also competent and experienced in running the U.S. payroll. You can always reach out to us for advice on running your U.S. payroll and far more by scheduling a free discovery call from this link to discuss your needs and our services.

So how do you pay yourself as a foreign, non-U.S. person and the rest of your team in foreign, non-U.S. countries?

The two most common and recommended options are:

• As a contractor for your U.S. company or
• As a “payroll employee” in your local tax country.

If you already have/own a company in your local country that employs your non-U.S. team (and maybe also you), and you want to charge these to your U.S. company, please read until the end and see the Other Compliance Requirements section.

 

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3) As a contractor

This is one of the most common ways that many non-US owners pay themselves and their non-U.S. teams.

If you are working for your company and providing services from your local country outside the U.S. territory, like many foreign / non-U.S. founders do, then you may be (and probably should be) compensated for it.

It may sound awkward to pay yourself (the owner) as a contractor, but it is the only way as a foreign, non-U.S. owner to get paid for your services “directly” from your U.S. company. There is also an “indirect” way (but as effective and compliant) to get paid by your U.S. company, which is covered below in “Payroll employee in your local tax country”option.

As a contractor, you may choose to pay yourself in different ways:

• Monthly/quarterly fixed compensation
• Pay as you go (based on hours worked with an agreed hourly fee or project completion)
• Pay as per milestones (e.g., certain deliverables)

These payment options also provide you with flexibility to determine your compensation.

Creating agreements for different payment options, different contractors from different countries, tracking and amending them while staying legally safe and compliant is not an easy task and usually requires a corporate lawyer, which we strongly recommend.

Another alternative that we also recommend is the Deel Remote Payroll platform, which provides all these options and more in a compliant manner. You can easily schedule a free demo from this link.

 

Your U.S. Company Taxes in the U.S.:

Your compensation (and your teams) as a foreign, non-U.S. contractor is generally a legitimate tax deductible expense for your U.S. company, thus reducing your taxable income and eventually, income tax to be paid.

We always recommend consulting with your U.S. accountant or lawyer to assess your U.S. company’s taxes and you can always reach out to us for a free discovery call to assess your needs and how best we can serve your business.

 

Your Personal Taxes in the U.S.

Contractor payments made to you as a non-U.S. person are generally not subject to taxes in the U.S. if you meet certain conditions such as those listed, but not limited to, below:

• Providing services from outside the U.S. (service income is generally taxed in the country where the services are provided from)
• As a contractor, you do not have a Permanent Establishment in the U.S. Your U.S. company is generally treated as a different legal entity than you and thus, simply owning a U.S. company may not constitute a personal Permanent Establishment for you.
• Contractor payments are for services and not for royalties, profit share, commissions, rent, interest, products sold/shipped, etc...
• The double tax treaty between your local tax country and the U.S. does not say otherwise.

Paying to yourself, as a shareholder, from your U.S. company as a contractor also has some compliance and tax considerations which we will cover in the below “Other Compliance Requirements” section.

We always recommend consulting with your U.S. accountant or lawyer to assess your personal taxes in the U.S. and you can always reach out to us for a free discovery call to assess your needs and how best we can serve your business.

We have articulated your U.S. company’s and your personal taxes in the U.S.

What about your U.S. Company’s and your personal taxes in your local tax country?

 

Your U.S. Company Taxes in your local tax country:

Given that each country has its own tax, payroll, and labor law regulations, we will not be able to cover the case for each country but will provide general guidance on the typical watch-outs.

In general, your U.S. company would not have a tax obligation in another country because of having contractors there, but there are certain and very critical watch-outs. Below are general examples.

We strongly recommend reviewing these and your specific case with your local accountant, lawyer or tax advisor to have an assessment for the specific country where you have contractors.

-- Permanent Establishment risk:

The country where you have contractor/s may assume that your U.S. company has a Permanent Establishment there and may levy taxes (income tax, payroll tax, social security and others based on the country's laws and regulations). This usually, but not limited to, happens when...

• The contractor works full time for the company as if s/he is an employee
• Your U.S. company provides office space in the contractor’s country
• and more criteria may be applicable in the local country

-- Full-time or part-time employee vs. contractor risk:

Certain countries may treat certain contractor relationships as having an employee in that country. This may trigger employer registration requirements for U.S. companies in that country. This then triggers payroll and labor law mandates such as filing/paying income taxes, social security, unemployment insurance, etc. This risk is usually linked to permanent establishment risk.

-- Indemnity, annual leave, termination, etc. risks:

If you have contractors who assume that they are employees of the company, they may also assume (and may expect) that they have employee entitlements for indemnity upon termination, annual leave days after completing a certain period of time, maternity leave, other paid time off, etc.

Though you may have communicated this clearly or you may have an agreement, they may still file a complaint with the local labor office and ask for indemnity from your U.S. company.

A well written agreement may minimize your risks. We recommend working with a corporate lawyer to draft these contractor agreements. Alternatively, Deel Remote Payroll platform has presence in 90+ countries, has assessed the risks and created contractor agreement templates specific to each country where your contractors are from. This helps minimize the risks for both your U.S. company and your non-U.S. contractors.

 

Personal Taxes in your local tax country

In most countries, personal income is taxed in some form or shape. If a person makes an income as a contractor, that person may have to file and pay personal taxes in the local tax country.

If the contractor exceeds certain monetary thresholds, s/he may also be required to set-up her/his company (even as a sole proprietorship) to file tax returns, pay social security, retirement funds, employer insurance, etc. in the local tax country.

This adds both tax and administrative burden and costs to the contractor which s/he may not be willing to pay, do or be capable of doing.

 

Contractor Sentiment when hiring

Some of the people you want to hire as a contractor may want to have Social Security and other employee benefits or do not want to handle their own personal income taxes or form a company, etc. This may limit your talent pool potential.

Please keep in mind that a contractor is an independent person working for your U.S. company and by definition, is not an employee of your U.S. company. They are also referred as “Independent Contractors”. Some more traditional people may prefer a safer bet of being a full-time employee of a local company vs. being an independent contractor.

Good news... You can eliminate most of these concerns and risks not only by using well written agreement templates (such as the ones in Deel Remote Payroll platform) but also with the last option of paying your non-U.S. people as “Payroll Employee in the local country”.

 

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4) As a “Payroll Employee”

This means hiring a non-U.S. person as an employee in her/his local tax country. Yes, a non-U.S. person would be hired but by “a local company” in the residence of the person, not by your U.S. company or its subsidiary or another company that you own.

Your U.S. company does not have to incorporate other companies or subsidiaries in all the countries they have people. A 3rd party company employs your people and even you.

This is also called “Employer of Record - EOR”.

Your U.S. company would outsource employment to a local company in the country where the people resource resides and this local company would employ the person, make her/him an employee of the local company with all the mandated benefits, meeting all the payroll, tax and labor law related compliance requirements of that country. It's like an outsourcing company, but hiring the people you want, working for you.

To do this, your U.S. company will be having a service agreement with this local 3rd party company and pay that local company for all related costs.

This option has many advantages but also a cost disadvantage.

• The main advantage is that most of the watch-outs (and risks) we listed above for the contractor option would be covered for your U.S. company and non-U.S. contractors.
• The main disadvantage is the cost as the local 3rd party hiring company (the Employer of Record) would charge for all the taxes, admin work, accrued benefits, etc. and plus have a profit margin to provide this service. There is a price for everything, especially for compliance.

Finding, negotiating and managing 3rd party outsourcing companies (Employer of Record) in all the different countries is a tedious task - imagine having teams in 4-5 different countries and trying to find such reliable EOR’s. Your corporate lawyer will also need to draft country specific agreements with each of these 3rd party EOR’s.

We would recommend considering Deel Remote Payroll platform’s EOR (Employer of Record) service available in 90+ countries. Having a single point of contact managing all the EOR’s in all different countries for you is a nice benefit.

With all the main options covered, you now know that you can hire, pay a foreign / non-U.S. person (even yourself) as a contractor of your U.S. company or as a local employee of a local company (your outsourced company known as “Employer of Record”).

Unfortunately, the compliance requirements of your U.S. company do not end here. Here are a few other compliance steps and to-dos.

 

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Other Compliance Requirements When Paying Foreign, Non-U.S. People

If you hire foreign, non-U.S. people as independent contractors or use an employer of record (EOR) to employ them in their local country, there are a few other compliance requirements.

 

Agreements:

When making payments to anyone, an agreement sets the legal and commercial framework. But what most people don't know is that agreements may also cover your U.S. company from a tax perspective. They may also protect the contractors in their local tax countries.

Independent contractor agreements should differentiate a contractor relationship from an employment relationship. Without this differentiation, your U.S. company may be at risk.

In addition, the typical legal and commercial protection of your U.S. company must be in place.

These agreements may also need to cover the country's specific requirements for non-U.S. contractors.

We always recommend working with a lawyer on these agreements. Alternatively, you can use Deel Remote Payroll platform’s agreement templates created for 90+ different countries.

 

W-8BEN Forms:

When paying non-U.S. individuals or companies, the IRS requires U.S. companies to assess whether to withhold taxes from the payments or not, and do the necessary.

If this assessment is not made, the IRS can make an arbitrary assessment of the due withholding tax and charge your U.S. company. You can object to this and explain and defend yourself, but it becomes a long and potentially costly legal process.

A U.S. company can complete this assessment by obtaining W-8BEN forms from non-U.S. contractors and vendors. If asked, simply showing the “contractor signed W-8BEN form” covers your basic compliance requirements on this subject and the IRS usually moves on.

It is the U.S. company’s responsibility to request, receive and store these W-8BEN forms, they are internal documents and not filed anywhere. Deel Remote Payroll also helps with this compliance item by mandating the completion and signature of the W-8BEN forms and storing them under each contractor.

 

Substantiation of expenses:

Apart from general agreements with foreign, non-U.S. contractors and W-8BEN forms, a U.S. company is also required to substantiate all its expenses and their relationship to the business.

For contractors, this substantiation is usually evidenced by invoices from the contractors, time sheets, list of projects completed, milestones achieved, etc.

Please make sure you have this substantiation in place in case you need to defend your expenses with the IRS (or even your state).

Deel Remote Payroll platform also facilitates the creation of contractor invoices (generates invoices for them), time sheet completion for contractors and more. In addition, it can sync these contractor invoices, time sheets, etc. with your accounting system such as Xero and Quickbooks. This makes your compliance and accounting very effective and efficient.

 

Related Party Payments:

When a U.S. company enters a relationship with a related party (e.g., you as the owner getting paid as a contractor), the compensation must be a “fair market value”, the agreement/transaction must at “arms length”. This is required mostly to ensure that there is no tax evasion by shifting profits.

If you already have a company (fully or partially owned by you or have some common shareholders with your U.S. company) in your local county that employs your non-U.S. team or maybe even you, and you want to charge all or some of the expenses to your U.S. company, the same related party principles apply.

One of the best practices (not always the only way) is to benchmark the charge to the related party with the market price to ensure an arms length transaction. This comparison may be needed while defending the charge against the IRS.

You would need a U.S. accountant, an experienced tax person or a U.S. lawyer to help you with this assessment. You can always reach out to us for advice and more.

You can also do this benchmarking task yourself, or get offers from independent 3rd parties.

The Deel Remote Payroll platform has a database of market prices for different roles and positions in different countries, which helps both set the correct compensation for your contractors and also set the fair market value for your own services.

Alternatively, you can always reach out to us to discuss all your tax, compliance and growth advisory needs as well as technology choices. Simply Schedule a Free Discovery Call from this link and let's discuss how best to serve and grow your business.

 

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Disclaimer:

This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation.

Tukel Inc. is not responsible for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Tukel Inc. does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.

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