Working for Americans - how does the tax work?

[zumm]

I am about to work for an American company while based in the UK. They tell me they'll tax at 30% unless I apply for a US tax ID. Does anyone have any advice on this? How much tax wld I have deducted WITH a US tax ID? Can I claim back the extra tax through my UK tax return?

I cannot imagine I'll earn more than about $15,000 per year. This is as a freelancer. I will be doing other freelance work for UK companies (which may come to about £5000, max). So we're really not talking big bucks so I'm keen not to lose money for lack of knowledge.

I am based in England and have a UK tax ID.

Thanks so much for any help!

I could be wrong but if you're a UK citizen, based in the UK and earning money in the UK, why should you be paying any tax to the US government? I'd have thought you're a 'non dom' as far as the US is concerned. If you're going to be working for several companies as a freelancer presumably you've registered as self-employed. And, if you're self-employed, you are not an employee of the American company. You're simply a UK agent from whom they buy services, paid in full (in GBP) and which you then declare to HMRC. I think you should talk to an accountant and/or HMRC to ask how best to set this up.

Thanks Cogito - funnily enough I was going to hijack another thread to ask YOU directly for help (you have been a help with money matters in the past) - so I appreciate your time with this.

The reason the US take tax is that this is their right - tho, if I understand correctly, I can apparently claim some of it back at this end (i.e. to bring the tax paid in line with what I would have paid in the UK). However, I agree with all your points (re UK agent living here from whom they buy services) which is why their statement that they will deduct tax came as such a surprise and seems rather odd...

Nonetheless, even tho they appear to have the right to take tax, I think there are ways of paying LESS tax on the American side - but not sure how that works. If anyone reads this and has any answers, pl let me know!

Yes, Cogito, I think I clearly need to get an accountant - or maybe a financial advisor? Any views on which would work better? Thanks again!

From my vague memories of this, you will get a credit in the UK equivalent to the tax you have paid in the US. Probably...why don't you call HMRC, and see what they say?

Talk to HMRC, the US shouldn't be taxing you. I wasn't taxed by the US when I worked in the US as we have a tax agreement, but I was taxed in the UK.
HMRC are great at sorting out and helping you with tax.

You need someone that understands both personal taxation and international employment law. I'd contact HMRC in the first instance. There's a long section on their website here about NI contribs for people in the UK working for overseas organisations. Mostly Embassies but it goes on to say this...

Most people working as an employee in the UK have a UK employer, or are attached to a business in the UK which is treated as their employer, who is then legally responsible for deducting Class 1 National Insurance from their pay.

Where there is no business in the UK (or in the European Economic Area (EEA)) responsible for deducting National Insurance, the employee must pay his or her own Class 1 National Insurance to HM Revenue & Customs (HMRC).

Tax aside, in your position I'd also want to know that I was covered by UK/EU employment law for things like holiday entitlement, redundancy, maternity etc.

Thats the US for you - you don't get to be the richest nation on earth without a huge amount of protectionism, and witholding tax is just one example.

If you are registered self employed you shouldn't have to pay Class 1 under the Direct Payment Scheme, so that is good news.

More good news is that you should not have to pay Income Tax on the $15,000 because you can offset the tax due using Foreign Tax Credit Relief, although you will still have to pay Class 4 NI.

US tax rule, which impacts the employing company is:

Unless they provide the US tax ID of the person they are employing, they have to pay a 30% withholding tax to the govt. Therefore they have to pay this whether they take it from you or not.

The US does not have PAYE, so to ensure everyone pays tax, the revenue compares the amount declared by employers to individual tax returns.

The only way round this is to get a US tax number (start here), then complete a US tax return.

The tax return you complete will either show you are doing work in the UK and not taxable, or raise the appropriate tax.

When you complete a UK tax return, any US tax paid is offset against UK tax bill to ensure no double taxation.

All - thanks so much for your help. Younger - this is incred clear and helpful of you. I really appreciate this. I have also heard that setting up your own US-based company is a good way to save a lot of money (tho I am not at all clear on why or how). Any ideas??

Thank you again!!