In Switzerland you would have to prove that you work as a consultant, this means: You could switch to a different company if the gig runs out or you could take on a different company as a customer. A way would be to work for two different companies at the same time and subcontract to someone else. Then you would be self-employed and would need to pay the mandatory insurance for age, invalidity, pregnancy, and so on yourself (10.6% of declared revenue), exactly as your employer and you, were you employed in Switzerland.

To get started as self-employed is a bit difficult. You need to bootstrap yourself with at least two customers. You need to show offers, orders, payments, advertisement for your service, and so on. They want to make sure that what you do is not circumvention of factually being an employee. A workaround could be to ask two friends if they could create an order for you, then you are free to offer yourself to a company and switch every three to five years.

It's not illegal. An EU person needs a legal entity in the EU (it can be either freelancer or a company) and then it's just usual B2B relationship where EU person pays their taxes, insurances etc. in the EU. US company still saves, i.e. instead of paying 200k to a fresh graduate they can pay it to a senior dev in the EU.

The illegal bit isn’t the pay structure but the treatment of a contractor as an employee. Both the European and US laws make this distinction with similar criteria. This is to make sure companies aren’t avoiding their obligations to employees. And just from a moral perspective if you’re expecting someone to act like an employee you should treat them in kind.

> "The illegal bit isn’t the pay structure but the treatment of a contractor as an employee."

What's illegal here exactly?

1. US Business Entity conducts business with EU Business Entity.

2. The person (let's call them a contractor) is employed as a full-time employee for the EU Business Entity. They also function as the owner of the EU Business Entity.

3. US Business Entity, EU Business Entity and the contractor - all pay their respective taxes as required by the laws in their jurisdictions.

This is the very foundation of how consultancies operate, for example:

1. The consultancy is the employer, the consultant the employee.

2. The consultant gets hired out to different clients, to work on different projects.

3. The consultant's salary gets paid by the consultancy, not the client.

4. The client only ever conducts business with the consultancy.

If the company contracting allows the contracting entity to maintain the autonomy and flexibility required then nothing. Just wrapping people in shell companies doesn’t usually avoid the legal tests for whether someone is being treated as an employee or contractor AFAIK.

> "Just wrapping people in shell companies doesn’t usually avoid the legal tests for whether someone is being treated as an employee or contractor AFAIK."

What does "wrapping people in shell companies" mean? As a person, you're either employed for a "shell company", in which case you've signed a contract and you get paid a salary - or you're the owner of a "shell company", in which case you get to choose how to manage the company's funds. You can also be both, simultaneously. You'll be paying taxes either way. Paying yourself a salary is a taxable event.

I'm still not sure what's illegal here?

What you’re talking about happens in the US as well, and courts have held that whether you are billing through a corporation or not doesn’t impact whether you are a de facto employee.

e.g., the owner of an LLC who bills through the LLC can still be found to be a de facto employee.

It doesn’t matter that you pay income taxes, what matters is that the employer isn’t paying payroll taxes, withholding income taxes, paying unemployment insurance etc.

> "It doesn’t matter that you pay income taxes, what matters is that the employer isn’t paying payroll taxes, withholding income taxes, paying unemployment insurance etc."

I think we're talking past eachother here.

The employer, in this case, is you (a company you own). You're also the only employee (a private person employed by that same company you own).

If your company decides to pay you a salary, your company must also deduct taxes, social security, benefits, payroll taxes, income taxes, pension, etc.

Your company must ensure the terms of your employment are compliant with all laws and regulations.

Your client enters into a contractual agreement to buy a service from your company. They're not responsible for your company's compliance with local laws and regulations. Your company will be charging the client a certain rate (gross), which is usually worked backwards from the "net salary" you as an employee want to make.

What you’re describing in the US and in the other jurisdictions I’m aware of essentially doesn’t exist.

The vast majority of single person corporations are pass through entities. There’s no income tax withholding , no salary, no corporate tax etc…

However even in the very rare case where you setup a non pass through entity, if your company only has one source of income and that is you the owner operating as a de facto employee of another corporation, in most jurisdictions that is false self employment.

What you’re describing is an often attempted loophole, and there’s plenty of precedent that it doesn’t hold up.

> "What you’re describing is an often attempted loophole, and there’s plenty of precedent that it doesn’t hold up."

I strongly disagree, it's not a loophole, it's literally one of the most used incorporation methods in Norway ("aksjeselskap", or "AS"): https://www.altinn.no/en/start-and-run-business/planning-sta...

This model isn't unique to Norway. Plenty of other countries offer similar incorporation methods.

The incorporation method isn’t the loophole. Paying someone through a corporation (regardless of its pass through status) and then treating them as an employee is the the attempted loophole. In the US and many other countries it doesn’t work.

> "Paying someone through a corporation (regardless of its pass through status) and then treating them as an employee is the attempted loophole"

But isn't that exactly how consultancies work though? The client enters into a contractual agreement with the consultancy, asking for specific consultants to help the client get certain tasks done. The consultants are "treated as employees" in the sense that they often have to physically work with the client, on the client's projects, during the client's schedules, having lunch in the client's canteen, working with the client's team, reporting to the client directly, using the client's tools and processes, creating IP for the client, etc.

There is a 20 part tes(it’s actually now a 3 part test with 4-6 sub parts each but it’s substantially still the same). The fact that the consultant has to physically come into work at a specified time and uses the clients tools is evidence for them being employees.

That their company receives income from multiple clients, and the engagement is for limited duration is evidence for them being contractors.

The IRS and local governments make the final determination.

https://www.everee.com/blog/irs-independent-contractor-test/

Thanks.

If there's a subjective test involved, where some things are left to interpretation and circumstantial evidence, my take here is that it would be wisest to work with a lawyer/accountant on setting up the correct structure for each engagement.

It's also good to remember that this is the IRS, and that other jurisdictions may have entirely different practices here.

> "False self-employment is a situation in which somebody registered as self-employed, a freelancer, or a temp is de facto an employee carrying out a professional activity under the authority and subordination of another company. Such false self-employment is often a way to circumvent social welfare and employment legislation, for example by avoiding employer's social security and income tax contributions."

Could you kindly explain how this definition of "false self-employment" is in any way relevant to the situation I just described in my original comment? I'm struggling to see it myself.

What about the specific situation I described implies circumvention of social welfare, or employment legislation, for example?

A company wants an employee, they plan on treating this person as an employee. However the company doesn’t want to pay the additional costs required by regulation. Payroll taxes, unemployment insurance, dealing with tax withholding, overtime where applicable, family leave requirements etc…

So they hire a contractor instead and pay them as a 1099 contractor, or the contractor sets up an LLC and they pay the LLC, or an S-corp.

Doesn’t matter how they pay them, if they treat them as an employee (there’s a 20 part test) they are a de facto employee and it’s false self-employment.

It's the LLC's or S-Corp's responsibility to deal with everything you've mentioned, not your client's. Your client is simply purchasing a service from your LLC or S-Corp, with a contract. The contract must not stand in violation of your local tax and employment laws.

It's a standard case of one company (a third-party) purchasing the services of another (a company you simultaneously both own, and are employed at).

This is an incorrect interpretation of the law.

The IRS will look at this situation and determine either the owner of the LLC is a de facto employee or not.

Whether they are billing though an LLC or not is not one of the factors.

Here’s a quick read about the topic: https://www.trimprulaw.com/an-individual-who-has-an-llc-is-a...

“Just because an individual which is engaged by a business has an LLC, does not mean that the DoL will classify that person as an independent contractor.”

You are looking at US->US relationship, making the same error as folks elsewhere with NL->NL relationship etc. The question is US->NL relationship etc. You are applying labor laws of one country into an international relationship.

> Your client is simply purchasing a service from your LLC or S-Corp, with a contract.

And if that's a fiction, a judge will see straight through it. Ask a lawyer if you don't believe us. I can think of several examples in the news lately in my country of residence.

> "And if that's a fiction, a judge will see straight through it."

I never claimed that "pro forma" contracts used for laundering illegitimate business relationships are somehow legal. This feels to me like an entirely separate issue, and I'm not sure how it's related to anything we've discussed so-far?

You can own a company, and simultaneously be the only employee in that company. Your client enters into a contractual agreement to purchase services from your company. Your company must comply with all local laws and regulations as part of your employment in that company. Your company charges the client a fee which, down the line, covers all of the business expenses associated with the work being done (including any taxes that need to be paid, overtime, insurances, pension, social security, etc). I'm still, to this moment, not sure what makes any of this illegal or illegitimate?

There is a 20 part test that covers whether you are considered an employee of the engaging company.

Whether the engaging company pays you directly or pays an LLC you own is not part of that test.

If the IRS or a local government decides that you are being treated as an employee of the company, they will ignore the intermediate LLC.

Think about your argument for a second. If it holds true, employment laws are useless.

Single owner LLCs are pass through entities and they have no obligations to pay minimum wage, overtime, unemployment insurance etc…

If your interpretation of the law stood, every company would simply require each employee to form an LLC and pay each employee as an independent contractor.

In fact many companies do try this, and the IRS and state departments of labor go after them for it regularly.

> "Single owner LLCs are pass through entities and they have no obligations to pay minimum wage, overtime, unemployment insurance etc…"

Perhaps an LLC (which is a pass-through entity) is the wrong structure to use here then. Perhaps a C-Corp would be more suitable?

Here's one example of what I'm referring to: https://www.altinn.no/en/start-and-run-business/planning-sta...

> "If your interpretation of the law stood, every company would simply require each employee to form an LLC and pay each employee as an independent contractor."

But that's exactly how companies hire external contractors today, so I'm not sure why you're suggesting there's anything wrong here?

The reason companies don't require each and every employee to form an LLC is because it makes things more difficult for everybody - not because it's illegal. Direct employment is much easier to manage, hence it's more popular. I don't see your point?

No the reason is because it’s illegal. You can’t engage someone in an employee employer relationship and pay them as an independent contractor.

>much easier manage

This is patently false. Contractors are much much easier to manage.

It is perfectly legal to hire contractors. There is nothing wrong with this. What you can’t do is hire a contractor and treat them as an employee.

There is a legal difference. The IRS has a 20 part test.

That's within a single country. There is a qualitative difference between cross-border business relationships and intra-country ones.

Contractors have no rights nor protections under employment law, they need to contribute to social system by themselves, they are selling their services and expect they can be released with short notice.

Depends, in Germany chances are that it falls under Scheinselbsttändigkeit (pseudo self-employment) which would be illegal.

That would be if the company were in Germany. But not outside Germany, there the freelancer is classified as "exporter" (both for US and EU clients).

the only issue is that you might be liable to pay social insurance (DRV), but only if they can show that you have only one long-term client, and I’m not sure if it applies to foreign clients, especially outside the EU (but it might)

AFAIK it doesn't apply to outside-Germany clients. The freelancer is viewed as exporter and contributes to German export economy. Mind you, a freelancer has no social safety net, no pension, exorbitantly expensive health care (900+ EUR) and no unemployment benefits either.

I think that’s why the DRV might step in and force a freelancer to pay into the social security system if they have a single client. If I recall it also applies to foreign clients, but I’m not 100% sure how far it extends. It’s definitely easier to bypass the DRV if your client is not German, but not entirely waterproof as I recall.

Nope. Contracting through a legal entity doesn’t prevent you from being a defacto employee.

Yep, in many places you would need multiple clients to prevent being seen as an de facto employee.

Some companies have different offices in different countries, and one can issue invoices to the one in the US for 6 months and the one in Dubai for another 6 months if that were a problem. I've never heard of anyone in the EU having "exporter" clients in the US to require multiple of them every year though.

It’s because no one is looking at this closely yet, because until recently it wasn’t popular enough to pop up on anyone’s radar.

The loophole you’re talking about is alas probably tax fraud, if you are paying from multiple companies that you own to make it look like your “contractor” had multiple clients.

Definitely fraud. I have multiple clients, products and take risks etc; everything associated with a business (a small business but business nonetheless): nothing has been ever faked. Being an employee but trying to disguise it to gain benefits is simply seen as fraud but usually not enough to get caught; many do it.

It has been popular, at least in NL for decades now: people invoicing eachother and moving money around just to make the threshold.

We are talking about companies operating outside EU. You are still set on companies operating in the same country. So a dev takes a risk, switches to a freelance mode, finds a client abroad, the client pays much better but at the cost of terminating agreement anytime, and for you it's a tax fraud? Smells like a crab bucket to me ("how unjust is it to earn that much more than me!").

Not my rules or ideas… if you try to invoice different companies to get around defacto employee rules we have here, then it is fraud; you probably won’t get caught. It’s not fraud ‘for me’, it is for the tax office of my country and, as other people have said, also maybe for the employer side. So I play it safe to make sure it’s neither, however, that is far different from taking a contractor job for one client for a long time; that often will be flagged as defacto employee and taxed like it.

I really think you are mixing completely unrelated things together. Just a thought experiment: there is a company that has no office/contact in the EU. Is a NL-based freelancer prohibited from working for them? In other words, is the freelancer prohibited from exporting their work to the country of origin of that company or not?

You keep applying laws for companies operating in NL to any arbitrary company operating elsewhere.

You can of course but there are rules that you need to follow for the tax office; if they mark you as defacto employee in NL for a US company, different taxation applies. You are marked as not an entrepreneur or company in that case and you will be taxed (a lot) more. I didn’t say anywhere it is illegal or prohibited anyway (I just said you will be flagged as defacto employee which brings consequences); it is just not very smart as you will have all the bad things and none/little of the good things working like that.

That depends on where you live in the EU, but it is something you need to be aware of. Applying for a US job and work remote could be a legal and administrative nightmare for an employer, especially if you're the only one not in the US. A workaround is to have an employer of record in your country, who will be doing the actual hiring, and you effectively act as a contractor or consultant. It's not a fantastic solution, but it does work.

Timezones are a major hassle. You will end up with a lot of weird late afternoon, early evening meetings, which isn't great for family life. That might not matter if you're end up in the top 3% earners and your partner doesn't need to work as a result.

For some countries also be aware of things like on call. A US employer might not be ready to deal with the legal requirements in your country.

It's not if it's properly structured. That usually means employee having some kind of legal entity (consulting firm) and having proper B2B contract.

The structure doesn’t matter. There’s a 20 part test of employee vs contractor.

If you are treating the contractor as an employee, they are a de facto employee and you should be withholding income tax, paying payroll tax etc..

Then come to Czechia and your problems are solved. There the test is simple - are you using your own equipment or do you have multiple clients or are you your own boss in terms of working hours and arrangements or could your contract end at any time or are you an exporter? Then you're clearly a contractor. Only one of these rules needs to apply.

It is probably doubly illegal. Not just in the US, but also in the country you live in. I don’t know for sure outside Germany, but I assume it’s similar: If you mainly live in Germany, you have to be hired according to German labor law (and pay taxes etc. in Germany)

Same in Poland. But this doesn't stop a lot, and I mean a lot companies from doing that.

I once accidentally did it in South Africa (went on a 6 months vacation, kept working for the company in Germany) because I didn’t know, and my boss didn’t either :D

It is not illegal in Germany if you follow the usual rules for self-employment. Proper tax registration, multiple clients over a timespan, independent negotiation of the prices, independently deciding working hours/days, and so on.

Yeah, in NL and UK and probably others, you would need to have a company with multiple clients to be not seen as employee.