CPA, Tax Attorney, Tax and Legal Adviser to Startups and Established Businesses, Focused on International Tax Issues
Mercury.co is another good alternative - a similar platform to Transferwise. It sounds like with your scale you will eventually need to open a USD account with a larger commercial bank in the U.S. (Wells Fargo, Citibank, Chase, etc). You can open a U.S. bank account for a U.K. company, even if the responsible party or shareholders don't have social security numbers (SSN) or Individual Taxpayer Identification Number (ITIN).
Unfortunately, it requires you to physically visit the U.S. and go into a branch office to open the account. I always recommend calling in advance to several branches and set up an appointment. Explain that you're a nonresident looking to open a U.S. bank account for a foreign corporation.
In cases where banks won't open accounts for foreign corporations, you can open a U.S. LLC (Wyoming or Delaware) that's 100% owned by your UK corporation. The US LLC can open the US bank account, and your sales deposits can funnel through those accounts.
Yes you should be reporting the capital contributions. Under the old Form 5472 rules, it's true that only items that impacted taxable income would be reportable transactions. So, a capital contribution by you to the corporation would not be reportable, unless the equity contribution was somehow below or above a fair value contribution in exchange for services that you might provide for the corporation - essentially an imputed reportable transactions.
When the IRS changed the Form 5472 rules to require non-U.S. owned single member LLC's, they expanded the reportable transaction definition to include virtually everything.
The term “transaction” is defined in Treas. Regs. Section 1.482-1(i)(7) to include any sale, assignment, lease, license, loan, advance, contribution or other transfer of any interest in or a right to use any property or money, as well as the performance of any services for the benefit of, or
on behalf of, another taxpayer.
So, for example, contributions and distributions would be considered reportable transactions with respect to such entities. These amounts can be reported on Lines 12 and 25 with an explanatory footnote that clarities the amounts are capital contributions and not amounts that impact taxable income.
Yes. Generally these amounts should be reported on Form 5472. If you are paying company expenses using your personal funds as the sole shareholder, the amounts would be classified as additional paid-in-capital contributions by the sole shareholder, so they wouldn't be recorded on the company balance sheet as a shareholder loan. These payments would fall under the category of "other amounts paid" or "other amounts received" on the Form 5472.
Under U.S. federal tax rules this arrangement would likely be treated as an installment sale. If you sell the website and are eligible for long term capital gain treatment, the long term capital gain treatment would apply to the initial cash payment, as well as subsequent payments made under the installment agreement.
You would compute your gross profit percentage on the sale of the asset, and apply that profit percentage to all future payments to determine how much of each payment is installment sale income.
There are a few parts to consider. Are you a U.S. tax resident and working from the U.S., or do you live and work from Canada? If you're a U.S. resident, you're generally subject to income taxes on your worldwide earnings, regardless of source. The U.S. revenue from sales to U.S. based customers are subject to federal income taxes and likely state income taxes.
Some of the more popular jurisdictions to form a U.S. entity are Delaware and Wyoming, because of the strong business laws, privacy protections and no state income taxes.
Your sales to Canadian customers may be subject to taxes in Canada. You'll need to assess whether you can leverage treaty benefits under the U.S.-Canada tax treaty. The treaty provides relief regarding what constitutes a permanent establishment in each country, and if you operate a Canadian corporation for your Canada business, the treaty provides reduced dividend withholding tax rates on repatriated profits.
You should definitely seek legal counsel. What your employer is doing is not legal under both federal and state law.
The first issue is whether the working arrangement you had is an employee relationship or a subcontractor arrangement. It's not uncommon for businesses to pay cash to subcontractors, but it's incredibly rare to see that in an employee context.
If your employer was treating you as an employee, they should have collected a Form W-4 and Form W-9, and they are responsible for withholding federal income taxes and payroll taxes on your taxable earnings, as well as issuing you a Form W-2 at year end.
I don't think there is anything wrong with having the same individual prepare your tax return and perform regular bookkeeping services. Most CPA firms and outsourced accounting practices will perform both functions. The key issue is to just make sure that the individual is competent and experienced in both areas and you should be fine.
I would agree with the other comments concerning employee versus subcontractor status. It's certainly easier to simply hire a subcontractor and pay him a fixed hourly rate without having to be concerned with payroll taxes, federal income tax withholding, employee health insurance, fringe benefits, etc.
If you hire him as a subcontractor and he is a nonresident for U.S. tax purposes, you need to collect an IRS Form W-8BEN from him to confirm his nonresident status.
If you don't collect this withholding certificate, the gross payments made to the contractor will be subject to backup withholding.
Nonemployee compensation paid to him during the tax year would likely be reported on a Form 1042-S and not a Form 1099-MISC. Forms 1099-MISC are used for U.S. tax residents.
If you decide to formally hire the individual as an employee and not a subcontractor, you'll need to analyze whether to withhold taxes on the employee's wages. U.S. employers are required to withhold payroll taxes at source on wages paid to employees. However, wages under Section 3401(a)(6) do not include remuneration paid for services performed by a nonresident alien individual. So long as you can confirm he is nonresident for federal income tax purposes, you won't be required to withhold payroll taxes on his wages. The greater issue, however, is what type of tax exposure you create in India by having an employee physically based in India. This could create payroll tax obligations in India, and could trigger corporate income tax obligations in India for your company.
It sounds like you are currently employed with a company, and you are spending your own money to complete tasks as an employee? If you are an employee of a company, your employer will issue you a W-2 which reports your annual wages, federal income taxes withheld, payroll taxes withheld, deductible health insurance premiums, and other employer provided fringe benefits. If an employee spends their own money on business related expenses for which the employer did not reimburse the employee, the individual is generally allowed to claim a miscellaneous itemized deduction for those unreimbursed employee expenses. The expenses are reported on IRS Form 2106 and carried over to Schedule A. However, recent U.S. tax reform has eliminated most of these expenses for employees.
If you want to be able to deduct those expenses, you'll need your employer to switch your status from an employee to an independent contractor. Your independent contractor compensation is reported on Form 1099-MISC, which is ultimately reported on Schedule C of your Form 1040. Those expenses you incurred through the LLC can then be reported on Schedule C and deducted. However, the IRS or state tax authority may challenge your independent contractor status depending upon the facts and circumstances.