US Client wants to pay me into US account - what are the implications?

Hi

I am a US expat, living and running a freelance creative business (LTD company) in the UK for my entire working career (15 years).

I have recently landed a rather large project with a client who is based in the US and due to the nature of their business (they receive government funded grants), they have asked if they can pay me direct through their grants rather than the company itself but this requires that they pay me via a US account. It would just mean that I'd have to transfer my income from my US account to the UK.

I'm considering this because they have been a long standing client and there is a lot more potential work to come - the client has offered to cover whatever costs it may mean for me to make transfers, international fees, filing fees, etc...  But I want to be sure I'm considering all potential issues with it.

Is there anyone else here that operates their business in this way and could you give me any advice? Is there any red tape or other costs or tax implications I need to consider (my UK accountant has said I could just get a double taxation tax waiver from the UK if I have already claimed this against my US taxes). I just want to be sure I'm considering all things.

Any advice at all would be hugely helpful.

Thank you!


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What kind of account, though? If they pay into a us personal account, there's a Pandora's box of issues mixing personal and business funds I can see - would the us then consider you self employed for that income and you'd have to pay self-employment tax. They would certainly have to issue a form 1099 which might set off audit flags if you didn't file your us tax as a self employed person. there's also the question of what expenses could you claim against that income and how that would affect your accounts in the U.K. .  Conversely, if you open a us account for your business, are you then setting yourself up for never ending reporting requirements. [i'm neither an accountant nor a lawyer, but I own my own Ltd business in Hong Kong and I've also faced, and refused, similar requests in the past]. The "best" solution might be to find a friendly company in the us that would sign the contract with them and invoice them but would hire you to do the work. You then invoice that us company from the U.K.  As I said I'm not a professional in this area and you should probably pay for real advice, but my instincts are all against it!


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How do you bill them? Will the payment to the account have any tax withholding or will it be just a payment for an invoice you send them? Also how do you pay US tax right now?

@ dd852 - thanks - this is really use useful insight. I hadn't thought of some of the things you mention, does sound like it would be complicated. To clarify, it would be a *personal* US account they would be pay into since I don't have any business status in the US at all.

On the other hand, what if I decided to do it the other way -- claim the income on my UK business account. Could I still be use my personal US account as a sort of "go between" to transfer accept the funds and then transfer into my UK business account and file for a US tax "waiver" if I can show the income is going to my UK business?

@nun - currently I do not pay US taxes b/c as I said all of my business earnings are in the UK and I'm below the threshold for paying US tax (although of course, I do fulfil my filing requirements). My only obligation to Uncle Sam at the moment is my annual expat filing obligation. And to answer your first question, I bill them at full rate, I don't add any VAT to my invoices.

Why does the company not want to simply pay an invoice from your company?
If they are trying to get around rules associated with their government grants they are playing a dangerous game.

@ dd852 - thanks - this is really use useful insight. I hadn't thought of some of the things you mention, does sound like it would be complicated. To clarify, it would be a *personal* US account they would be pay into since I don't have any business status in the US at all.

On the other hand, what if I decided to do it the other way -- claim the income on my UK business account. Could I still be use my personal US account as a sort of "go between" to transfer accept the funds and then transfer into my UK business account and file for a US tax "waiver" if I can show the income is going to my UK business?

@nun - currently I do not pay US taxes b/c as I said all of my business earnings are in the UK and I'm below the threshold for paying US tax (although of course, I do fulfil my filing requirements). My only obligation to Uncle Sam at the moment is my annual expat filing obligation. And to answer your first question, I bill them at full rate, I don't add any VAT to my invoices.

What threshold are you below? Has the UK Ltd company made a check the box election; or are you paying so little in dividends that you are at the zero percent rate on dividends?

Are you filing Form 5471, 8858 or 8865 for the company?

I would have thought it made most sense for the UK Ltd to own a new opaque US entity; eg an LLC that has elected to be taxed as a corporation and for the new US entity to do the invoicing. However, the answer might change, depending on the US tax treatment of your existing foreign entity.

@ dd852 - thanks - this is really use useful insight. I hadn't thought of some of the things you mention, does sound like it would be complicated. To clarify, it would be a *personal* US account they would be pay into since I don't have any business status in the US at all.

On the other hand, what if I decided to do it the other way -- claim the income on my UK business account. Could I still be use my personal US account as a sort of "go between" to transfer accept the funds and then transfer into my UK business account and file for a US tax "waiver" if I can show the income is going to my UK business?

@nun - currently I do not pay US taxes b/c as I said all of my business earnings are in the UK and I'm below the threshold for paying US tax (although of course, I do fulfil my filing requirements). My only obligation to Uncle Sam at the moment is my annual expat filing obligation. And to answer your first question, I bill them at full rate, I don't add any VAT to my invoices.

Don't forget that the second you incorporated as a Ltd company, it became a separate legal entity - it and you are different! It would be as if you asked a company to pay your paycheck into your aunt's account for convenience's sale instead of your own. Even if for some reason they consented to do so, both you and your aunt would have a mound of reporting and explaining to do and possibly a world of trouble besides


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* * * they have asked if they can pay me direct * * * rather than the company

I don’t see an issue with this as long as you are consistent in your treatment in both the U.S. and the U.K. (i.e., that you are receiving the payments and not your Ltd company receiving the payments.  I think it would be wrong to represent that (to treat it as though) you were receiving the payments for some [U.S.] purposes and your company was receiving the payments for other [U.K.] purposes.

my UK accountant has said I could just get a double taxation tax waiver from the UK if I have already claimed this against my US taxes

I am not sure that I fully understand what your accountant meant, but if you only perform the services from the U.K., you would have U.K. source income and the U.K. would have the first right to tax the income and the U.S. would allow a foreign tax credit.

I don’t like Guya’s suggestion to form a U.S. entity that is taxed as a corporation.  I suspect that this entity would be subject to U.K. tax either because it is managed and controlled in the U.K. and/or because it performs services in the U.K.

However, Guya’s point about filing the appropriate U.S. tax forms is important.

The short (simple) answer is that you should probably just tell them they should pay your U.K. company directly.

What threshold are you below? Has the UK Ltd company made a check the box election; or are you paying so little in dividends that you are at the zero percent rate on dividends?

The threshold for **paying taxes** - i.e. i do not make enough to pay US taxes. Someone else had asked about my US tax status, this was my reply.

Without going into personal detail about my earnings - I do not have any tax obligation to the US either via my business or my personal accounts (other than my filing requirement). I literally only have my US account to pay my student loans and it does not have any significant funds in it (please don't make me get specific!lol)  and only make enough money through my UK business to support myself and that's it. I think this part should be pretty easy to digest.

Are you filing Form 5471, 8858 or 8865 for the company?

I filed a 5471 for my LTD company

I would have thought it made most sense for the UK Ltd to own a new opaque US entity; eg an LLC that has elected to be taxed as a corporation and for the new US entity to do the invoicing. However, the answer might change, depending on the US tax treatment of your existing foreign entity.

Thanks for all the advice. I really am just looking for the easiest and most cost effective way to manage this. I do understand now, however, the need to keep the personal and business matters separate and the complications that would arise from not doing so.

That said, if I am understanding correctly, I do business and file accordingly in the respective locations as such:

1. USA - I accept the US client monies into my US personal account and it doesn't come anywhere near my UK LTD Company. Then file with Uncle Sam as a self-employed freelancer.

2. UK - I withdraw those monies from US personal account into UK personal account for the purposes of my personal expenses (rent, food, etc - I have very little overheads / business expenses anyway, and most can be billed on US services, on a US credit card, which I have). Monies transferred from the US **personal** account to UK **personal** account will already be claimed as taxed in the US when I do my UK self assessment tax returns.

So essentially, act as a freelancer in the US and in the UK, use UK my limited company for UK based business only.

Am I wrong in assuming this would be OK to do without any tax confusion?

I still don't understand why the US company cannot simply write a check to your company for the services provided. Is there something in their US Government grants that stops them from employing foreign companies?

I still don't understand why the US company cannot simply write a check to your company for the services provided. Is there something in their US Government grants that stops them from employing foreign companies?

I'm not sure but yes, it may have something to do with that. From the what I understood, though, they are currently paying me out of their company profit (they are not a non-profit) but could otherwise pay me from the government grant directly and it may mean they can pay me more if they do the latter. Whether or not it's a legal thing, I am not sure. I guess I will have to have a candid conversation with them about that.

Thanks for all the advice. I really am just looking for the easiest and most cost effective way to manage this. I do understand now, however, the need to keep the personal and business matters separate and the complications that would arise from not doing so.

That said, if I am understanding correctly, I do business and file accordingly in the respective locations as such:

1. USA - I accept the US client monies into my US personal account and it doesn't come anywhere near my UK LTD Company. Then file with Uncle Sam as a self-employed freelancer.

2. UK - I withdraw those monies from US personal account into UK personal account for the purposes of my personal expenses (rent, food, etc - I have very little overheads / business expenses anyway, and most can be billed on US services, on a US credit card, which I have). Monies transferred from the US **personal** account to UK **personal** account will already be claimed as taxed in the US when I do my UK self assessment tax returns.

So essentially, act as a freelancer in the US and in the UK, use my limited company for UK based business only.

Am I wrong in assuming this would be OK to do without any tax confusion?

The work is being done in the UK and you are UK resident so the UK is your primary taxation authority. You pay the tax to the UK first and claim it back against US tax.

I think there might be some issues with being a US sole proprietor and being UK resident and also doing the work in the UK. If this does fly you will have to pay US FICA and Medicare and probably won't get credit for that in the UK.

Why can't your client simply write a check to your UK company?

I'm not sure but yes, it may have something to do with that. From the what I understood, though, they are currently paying me out of their company profit (they are not a non-profit) but could otherwise pay me from the government grant directly and it may mean they can pay me more if they do the latter. Whether or not it's a legal thing, I am not sure. I guess I will have to have a candid conversation with them about that.

That would be good. With anything involving Government contracting you must be 100% on the level. It sounds as if you client is trying to hide a foreign payment. If doing things 100% on the levle means a smaller check....take the smaller check.

The work is being done in the UK and you are UK resident so the UK is your primary taxation authority. You pay the tax to the UK first and claim it back against US tax.

I think there might be some issues with being a US sole proprietor and being UK resident and also doing the work in the UK. If this does fly you will have to pay US FICA and Medicare and probably won't get credit for that in the UK.

Ah OK, thank you for highlighting that. I hadn't considered this at all, particularly with regard to FICA and Medicare. This does make it complicated. I have also just realised that I have friend who works in Bangkok and files as a non-resident US taxpayer but I will have to look into how this relates to my situation. 

Why can't your client simply write a check to your UK company?

Again, i just think it's to do with how they distribute the grant monies. But I'm not sure if there re any legalities on their end. I will have to look into that.