Four ways to be paid for the same code, and four different tax outcomes

Not a job title, but a set of relationships. Britain asks whether the engagement looks like employment. America asks whether you are an employee, a sole trader or the owner of a company. Those two questions have different answers.

Each route has its own paperwork. An umbrella company can employ you and run payroll, or your own limited company can invoice the client. Alternatively you invoice as a sole trader, or a US client pays you directly while you live in Britain. Four routes, four sets of consequences.

Britain treats those four very differently, and so does America. Crucially, the differences do not line up.

So the sensible order is to fix the engagement type first, then work out both tax positions from it.

Who operates payroll, and on what. HMRC's guidance on off-payroll working sets out when an engagement counts as employment for tax even though a company sits in the middle. For medium and large clients the determination rests with them, so you receive a status decision rather than making one yourself.

The determination usually rests with the client for medium and large businesses. You receive a status decision rather than making one.

That decision changes your British take-home considerably. It changes your American return much less, because employment income is employment income either way.

Our article on IR35 for a US citizen contractor covers the status tests in detail.

Because the United States looks through it. A UK company owned by a US person is a controlled foreign corporation, so its profits can be taxed to you before any dividend is paid.

Reporting comes on top of that. Form 5471 carries the information, and the penalties for missing it are not small.

That does not make the structure wrong. It makes it a decision worth pricing properly.

Our articles on a US person with a UK limited company and the GILTI and NCTI rules set out the mechanics.

For paperwork, yes. For social security, no. Sole trader profits are self-employment income in America, and the IRS is explicit that you count them all when figuring net earnings even where the exclusion removed the income from income tax.

The social security agreement is what removes that charge, and the IRS explains the framework behind these agreements. A certificate of coverage from HMRC is the evidence.

So the sole trader route is administratively light and needs one extra document. Our note on going freelance in the UK covers the British registrations.

Then nothing moves for British purposes, because work performed in Britain is taxable in Britain whoever pays for it. What changes is the American mechanics: a US client rarely withholds anything from a contractor, so tax becomes payable in instalments through the year instead of arriving through a payroll.

The American side changes in one practical way. A US client rarely withholds anything from a contractor, so tax becomes payable in instalments rather than through payroll.

Missing those instalments adds charges to a bill that was always coming. Our article on estimated tax while living abroad explains the timetable.

A standard British optimisation that behaves oddly across the Atlantic. Dividends are not earned income, so the foreign earned income exclusion does not reach them at all. A tech contractor who takes a low salary and high dividends can cut UK tax while raising the American bill, and sometimes the reverse.

A low salary and high dividends can therefore reduce UK tax while increasing the American bill. The reverse also happens.

Model the combination rather than copying a British accountant's default. Our article on salary or dividends works through the arithmetic.

Share awards are where the timing diverges most. The two systems recognise value at different moments, so a single vesting event can produce tax in one year here and another year there.

Options add a further layer, because British schemes with tax advantages usually have no American equivalent.

Get the plan documents reviewed before you accept, not at exercise. Our article on restricted stock units covers the common pattern.

Possibly, once turnover crosses the threshold, and the question has nothing to do with America. VAT is a British consumption tax and does not appear on a US return at all.

It still matters commercially. Registration changes your invoices, your cash flow and your admin.

Our article on VAT registration for a US founder sets out when it becomes compulsory.

Each country decides for itself, and the two lists differ more than people expect. Britain allows expenses incurred wholly and exclusively for the business, while America applies its own ordinary and necessary test. Home office costs, equipment and travel are the usual points of difference between them.

Home office, equipment and travel are the usual points of difference. An expense allowed here can be restricted there.

Keep one set of records that supports both claims. Two separate systems of bookkeeping produce two different profits and endless reconciliation.

Our article on Schedule C for a UK sole trader sets out how the American form treats them.

Almost always, in one form or another. An umbrella payroll deducts Class 1 contributions, a sole trader pays Class 2 and Class 4 through Self Assessment, and a company director pays Class 1 on salary. The route changes the class and the amount rather than the principle.

This matters more than it looks, because those contributions are what the American social security agreement points at.

Our note on National Insurance for Americans explains what the contributions buy and how they are recorded.

That is employment rather than contracting, and it raises a payroll question instead of a status one. A US company with no UK presence often has no way to operate PAYE, which pushes the reporting onto you.

Some employers use an employer of record to solve it. Others ask the worker to invoice instead, which turns an employee into a contractor and restarts this whole analysis.

Our articles on remote work for a US employer and a US employer with no UK payroll cover both versions.

Britain runs to 5 April and America to 31 December, which splits every contract awkwardly. A project running from January to June sits in one American year and two British ones.

So invoice dates matter for more than cash flow. They decide which year each amount belongs to on each return.

Keep a simple ledger of invoice date, payment date and amount in both currencies. That one habit removes most reconciliation work later.

In our practice, contractors who bill monthly have far tidier returns than those who bill on milestones.

Run through this before signing, ideally with the contract in front of you.

Less than the day rate suggests, and the gap differs by route. An umbrella arrangement deducts the most at source and leaves the least to plan around. A company retains more in Britain and adds American reporting that costs money to produce.

So compare net positions rather than gross rates. A tech contractor on £550 a day outside IR35 may keep less than one on £500 inside it, once both returns are paid for.

We build that comparison from the actual contract, because the generic tables online ignore the American half entirely.

Contracting removes the benefits an employee takes for granted, and each replacement has a tax answer. A personal pension attracts UK relief and needs checking against the treaty position for American purposes.

Professional indemnity insurance is an ordinary business expense in both systems. Income protection usually is not.

Set these up early rather than in March. A pension contribution made before the British year end is worth more than one made after it.

Our clients who treat contracting as running a business, rather than as a differently paid job, end up several thousand pounds better off.

Take an illustrative engagement. A US citizen in Manchester contracts at £600 a day, first through an umbrella payroll and later through her own company.

The umbrella year is straightforward. PAYE covers the British tax, credits cover the American side, and the return is short.

The company year is not. Corporation tax applies to profits, dividends fall outside the exclusion, and Form 5471 arrives with the return. The take-home is higher in Britain and the American cost rises. The figures are illustrative; the trade-off is real and it should be priced before incorporation.

First, incorporating on British advice alone. Second, comparing day rates without comparing engagement types.

Third, treating dividends as though the exclusion covered them. Fourth, forgetting instalments when a US client pays gross.

Fifth, signing an equity package without reading it across both systems. Sixth, leaving the certificate of coverage until the return is due.

Seventh, assuming a UK accountant's default suits a tech contractor with an American passport. The advice is usually right for Britain and blind to the other return, which is where the cost lands.

We price the engagement types side by side before you commit, then set up whichever one you choose properly. That usually means a certificate of coverage, an instalment schedule and, where a company is involved, the reporting calendar that comes with it.

Our US federal return service covers the return and the forms, and we prepare the Self Assessment position alongside so the two agree.

Send us the contract before you sign and we will tell you what each route keeps.