Ask HN: Remote US employees = tax nightmare?

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.

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.

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/ 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.

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

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.