USA
United States of America
in numbers
The US scores highly in the legal category because individuals can start freelancing and invoicing without any registration requirements such as paperwork, fees, or waiting periods. This makes starting a self-employed activity simple and efficient.
Contract classification is complex and difficult to navigate due to multiple authorities applying different rules, combined with the interaction between federal and state laws and relevant case law. Authorities typically assess the degree of control exercised by the company over the contractor and are proactive in reclassifying arrangements.
From a tax perspective, the US offers relatively low taxes for a comparable level of income across countries. For example, at an income of US$4,000 per month, the tax rate is approximately 12.62%. However, self-employed individuals must also pay Social Security taxes that would otherwise be covered by an employer. Additionally, the difference in taxes owed in cases of misclassification is relatively low, and tax declaration and payment processes are straightforward.
Penalties for misclassification can be significant, and the US government can charge you for misclassifications years after they actually occur. Authorities are proactive in reclassifying arrangements, and penalties for employers can be substantial. Together, these factors increase the overall tax exposure risk.
Doing business in the US is very straightforward. Individuals can start freelancing without registration requirements, and it is easy to receive payments, issue invoices, and open bank accounts, contributing to a high score in this category.
The US is well known for its strict immigration policies. It does not offer a digital nomad visa or similar alternatives and has recently tightened standard immigration processes. As a result, it scores zero in this category and is not an ideal hub for digital nomads.
Key takeaways
Contractors have a strong advantage in that there are no complex registration requirements. This makes it extremely easy to get started and begin earning income. Tax declaration and payment are straightforward, and doing business and receiving payments is simple. However, the US is known for its strict immigration policies. It does not offer a digital nomad visa, limiting its attractiveness for globally mobile workers.
Frequently asked questions
Yes, either as self-employed contractors or via an employer of record (EOR). Hiring employees directly (without an EOR) requires your business to be registered in the US, making this approach impractical.
There are no specific regulations around the use of EOR’s, but they are allowed and commonly seen in practice. Most US-based companies just use PEO’s because they are already locally established, which is why PEO models are more prevalent than EORs.
If you hire a team member in the US as an independent contractor and do not have a local entity, your company generally has no obligation to withhold taxes. The contractor is responsible for declaring and paying their own income taxes and social security contributions.
Although company-paid health insurance for contractors is not common in the US, it is also not one of the primary indicators of misclassification.
Determining the correct contractual relationship
If US authorities review the relationship between a company and a freelancer/contractor, they may classify it as a B2B arrangement if certain conditions are met.
Key factors typically considered include:
- The contractor does not have the right to hire or fire within the company
- The contractor is not part of the organizational structure and is not an integral part of the business
- The contractor has the ability to subcontract the work
- There are no employees performing similar work within the company
- The contractor does not dedicate the majority of their working time to the company
- Compensation is structured on a per-project basis rather than hourly or monthly
- The contractor has control over how the work is performed
- The contractor provides services to multiple clients
If the relationship does not meet most of these criteria, it is likely to be classified as an employment relationship. In such cases, the following sections outline the associated risks of reclassification.
Financial risk associated with a potential contract misclassification
If a contractor is reclassified as an employee in the US, the company may be required to pay backdated wages or benefits, as well as backdated employment taxes.
Additional taxes
In the US, the tax and contribution difference between hiring and employee and a self-employed contractor is approximately 10.53%1. Of this, 2.88% is typically attributable to the employee and 7.65% to the employer. However, in cases of misclassification, the full amount is generally charged to the employer since they hadn’t been withholding the employee’s taxes from their pay. The company may be held liable for these amounts and owe back payment of benefits if not provided.
In the US, you can be charged for misclassification up to 10 years after it occurs.
1 To keep things comparable, we use a gross income of $4,000/month to determine the potential exposure. The calculation takes into account equivalent taxes paid to the authorities by the self-employed person during the same period of time. The exact amounts might be different depending on your regular payouts.
What could trigger a compliance review?
In the US, a compliance review may be triggered by routine audits conducted by authorities, complaints, or lawsuits from dissatisfied contractors or employees.
How will any additional amounts be charged?
If the US authorities reclassify a self-employed contractor as an employee, any additional taxes or related penalties are typically charged to the employer. If there is no US entity involved, authorities may attempt to recover taxes and payments through international treaties with other jurisdictions, but this is rarely seen in practice.
Will a local contractor trigger a permanent establishment?
Yes, hiring a local contractor in US can trigger a Permanent Establishment (PE)2. This may occur if the contractor works for the company over an extended period, typically more than six to twelve months.
However, the PE risk is generally lower when engaging a contractor in the US compared to employing someone without a registered entity, such as when hiring through an EOR.
2 A PE represents a fixed place of business through which a foreign company conducts its commercial activities in the US. If a PE is established, the business income associated with it will be subject to local taxation.
Is paid health insurance one of the indicators used by local authorities to determine if a worker is misclassified?
Health insurance is not considered a primary indicator of misclassification. While it may be taken into account, authorities typically place greater emphasis on the level of control exercised by the company over the worker.
Offering paid health insurance to contractors is not common practice in the US. Instead, companies typically offer higher gross compensation, allowing contractors to arrange their own insurance.
About the Future of work index
This information is provided by SafetyWing in collaboration with a Big 4 company to assist companies in understanding potential compliance risks. While we strive to provide accurate and up-to-date information, it should not be used as the sole basis for ensuring compliance. Individual circumstances and changing laws may alter the applicability of this information. Please seek appropriate professional support.
