IRS rules on corp to corp tax

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sheri
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Joined: Thu Jun 10, 2010 9:53 am

IRS rules on corp to corp tax

Post by sheri »

Hello,
I am the sole employee of a incorporated company in Canada. I currently work for a US company and they pay my Canadian company directly so no W2 and no 1099 issued. I live in Canada and pay all my taxes in Canada. Now the US company is telling me that they can no longer keep the corp to corp arrangement because of recent IRS independent contractor/employee clamp down. If I was self employed, I will be considered a W2 employee because of the 20 factor test. But I am incorporated so I'm hoping that this does not apply to me. I do not want to go on W2 because there is no benefit to me. Is there a legal loophole for my situation?

thanks
nelsona
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Post by nelsona »

This seems silly, since YOU are not their contrator. Really you are the employee of YOUR corporation, not theirs.

I believe these rules apply to those being paid by 1099, not corp-to-corp.

Most everything I've read says that as long as the firm did not "force/coerce" you into becoming a corp, then you are not considered a independant contractor, and are above scrutiny.
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nelsona
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Post by nelsona »

Besides, if you were to become their employee, it would have to be thru a Cdn payroll.
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sheri
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Post by sheri »

thanks so much for the quick reply! they want to terminate the contract with my company and hire me directly on US payroll. I am currently on a TN visa. Can you recommend a course of action to take?

thanks again!
nelsona
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Post by nelsona »

You need to convince them that their interpretation of IRS threats are incorrect. Hire a tax lawyer to convince them if necessary.

How often do you enter US? If you live in canada, you can probably enter US on B1 rather than TN (depends on type of work). That would efinitely remove any question of sponsorship.

You could try and get a second client (if you don't have already) that would help you both in US to fight this, and in canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
sheri
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Post by sheri »

i usually am in the US Monday to Thursday and I fly back Thursday night. I do make sure I'm there less than 183 days so I don't have to file as a resident. thanks you!
nelsona
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Post by nelsona »

Just remember that it is 183 days in ANY 365-day period.
and count Monday to Thursday as 4 days. Sunday to Thursday as 5 days.

If you are working physically in US, then W-2 (as a TN) would be feasible. You would be taable in US at that point, and pay FICA (no longer CPP).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
JGCA
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Post by JGCA »

As Nelsona said you would need to have at least one or two more clients to show you are an independent contractor and not an employee in disguise using a corp. Since you are working out of Canada being your main filing base of the corp CRA will attack your corp to corp set up and say its what they refer to as a prescribed service business meaning the corp gets no deductions is taxed at the hi rate no small business deduction and the only deduction you get is salary, so if your taking out dividends as most people in your situation do you will be subject to a huge tax liabiklity in that no deductions will be allowed in the T2 fiiling and btw you were never suppose to use the small business tax rate since teh income was not canadian sourced which entiltled you to claim the small bus deduction.

On the US side you will also be deemed an employee since you will probably be in the US more than 183 days and they too will disregard the corp, its best to deal with it now and go on payroll to be sure you get credit for w2 witholdings against your canadian tax filings.
JG
nelsona
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Post by nelsona »

JG, are you saying that IRS will deem her an employee because she is over 183 days, or because of her existing conditions?

the 183 days refers to IRS taxation if she was a contractor.

Are you saying that if she stays under the 183 day mark, she can keep corp-to-corp, or not? That is what I am thinking.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
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Post by nelsona »

The problem with employee status is that none of her travel is deductible in that case. And there will be a sever reduction is remuneration, as she will now pay FICA, instead of both sides of CPP, and her fringe benefits as a US employee living in Canada are useless (except for 401(k) maybe).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
JGCA
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Post by JGCA »

I would imagine that she is going to be over the 183 days and therefore deemed a resident, if she puts in 4 days a week in the US.

As for the independent contractir the IRS will attack it nevertheless due to teh fact she is really working for onkly one client and all expenses will be denied in Canada also.
JG
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