> "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.