Commission earned by US employees

Commission earned by US employees

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Good afternoon all. I'm following through some tax advise given to us by our American accountant approximately six months ago which pre-dated my time at the company. The situation is a follows:

We are a UK company which has a subsidiary located in the US. The US company employs several sales people who's salaries are paid by the US entity through a US registered bank account. The salaries go through a US payroll bureau so I am satsified the appropriate employer and employee deductions are being made.

All the turnover generated is invoiced through our UK entity at present. On the advice of our American accountant, the commission earned by the US salepeople is currently paid gross through the UK entity via a bank account denominated in USD to "avoid there being sales income which would be taxable in the US". We are clear with the employees that they are responsible for the administration of their personal taxes in the US on the seperate payslip we issue, showing only their commission for the month.

I would prefer it if we paid these sales staff their salary and commission through the US entity to comply with the employment laws however would this in any way give rise to the UK company having a presence in the US (due to the invoicing going through the UK company). What would be the implications of the UK company having a presence in the US? Would it just be that witholding tax would / should be deducted from each invoice or is it far more complex than this?

Any help or pointers would be greatly appreciated.

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By lizzit
19th Oct 2011 21:05

I can't see why they wouldn't pay the US sales staff through the US entity.  It sound false to do it this way.  It's not avoiding much in the way of sales tax, but it is avoiding a LOT of US employment taxes.  And not necessarily in a good way. 

Paying the US employees of the US subsidiary through the US payroll system should not create a US presence.  However, other actions (such as the invoicing) may, depending upon how the entire corporate structure. 

I'd seek direct US advice from a dual qualified US/UK corporate tax advisor.  I can provide several names offline if you like. 

[email protected]

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By frustratedwithhmrc
20th Oct 2011 10:11

Surely this avoids US payroll taxes?

Although the setup here is allegedly to avoid US sales taxes, it sounds as though the result also avoids (possibly evades) US payroll taxes.

Sure, the employees might straighten the income tax situation out through their own personal tax returns, but the income is still higher than it should be as payroll taxes are avoided (possibly evaded).

I would be very reluctant to annoy the IRS, they have VERY draconian powers. Equally, your own involvement might get you dragged into this if you are not careful. It is all too easy for the US to demand your presence in a US court room to answer charges and there is very little protection against this.

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By jimmyjazz
20th Oct 2011 16:18

Thanks for your responses guys, much appreciated.

It seems as though it's as simple as we've just been given from very bad advice from our US accountant. Going forward I'll make sure we do the right thing but surely I shouldn't get into any hot water because of something that was going on before I joined the company?! Assuming we made a voluntary declaration to the IRS of the situation and paid over any backdated employer taxes the offence would be mitigated?

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By frustratedwithhmrc
20th Oct 2011 16:44

I would strongly advise against it

The IRS are NOT HMRC.

Although the sort of disclosure you describe is commonplace in dealings with HMRC (who are more interested in ensuring that matters are correct, both historically and going forward and any interest and penalties are paid) - dealing with the IRS is very different.

You need to be very careful to avoid criminal procedings, against the company, yourself and the US employees. The fact that these payments preceeded your involvement will not exhonerate you in the eyes of the IRS, although it may be used in mitigation during subsequent proceedings.

A standard IRS tactic is to throw multiple charges of criminal tax evasion, money laundering and fraud at all of the involved and then do a plea bargain with whoever squeals first to criminalize the rest, it does not even matter if these charges have little or no substance. These are not pleasant people and they do not use civilized tactics.

They may also cease all of the assets of the company and involved employees (yourself included) and freeze all known bank accounts purely on the basis of suspected tax evasion, as this makes it much more likely that a settlement in favour of the IRS will be reached. It also makes it much harder for companies and individuals to defend themselves.

Once you have full details of all of the undeclared payments, you should retain someone who specialises in IRS settlement negotiations and can give you guidance on whether the IRS WILL settle the matter without recourse to criminal proceedings for tax evasion.

You should also highlight the potential issue with the attorney that deals with your US business, he/she may be able to recommend someone from their own firm deals with the matter.

DO NOT TRY AND DEAL WITH THIS MATTER YOURSELF AS YOU ARE IN DANGER OF MAKING MATTERS WORSE.

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By lizzit
21st Oct 2011 11:51

I would like to agree with Frustrated...

I agree 100% with "do not try to deal with this matter yourself."  Totally.  However, it leaves a lot of open questions, most particularly, "What do I do instead?"  He has suggested you contact your lawyer, but the lawyer may not have any good referrals for you.  If he gives you two or more referrals, you'll want to know what to look for to pick which firm is right.

You should work with a US tax specialist, probably one based stateside but with some international exposure, to resolve this problem.  The reason for using a stateside firm is that employment paperwork and information reporting (as opposed to annual tax forms) is generally not handled by UK-based US tax prep firms. The UK-based US tax prep firms can assist with structuring and planning and helping a stateside firm get the international details right, but not with actual filings of weekly US payroll, monthly US sales taxes, etc.  The ideal firm may be one that has its feet in both countries rather than one just in the US or just here in the UK.  Or it may be that you pick a stateside firm that has a good business relationship with a UK-based US tax prep firm (or vice versa).

Your problem resolution person would be either a CPA or an Enrolled Agent.  You probably don't need a full on tax attorney for this type of problem.  The firm where your problem resolution person works should be one that routinely handles payroll issues, particularly queries relating to subcontractors vs employees.

If your US attorney does not have any leads for you, I would be happy to provide you with some offline.

[email protected]

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