Navigating Tax Laws: How a European Founder of a US Startup Can Pay Himself a Salary

As a European founder of a US startup, you are likely navigating a complex web of tax laws and regulations. Understanding your obligations and the legal processes is crucial to ensure compliance and avoid potential financial penalties. This article aims to clarify the steps and considerations involved in paying yourself as a salary, while complying with both US and European tax laws.

Understanding the Two Sets of Issues

When you are the founder of a US startup, you are essentially dealing with two distinct issues: the company as a legal entity and yourself as a physical person. The company must pay you for the services it receives from your work. These payments are legitimate business expenses and can be deducted from the company's taxable income. However, you, as a person, are also subject to income tax in your home country, regardless of where your company is located.

For example, if you are a US migrant living and working in the US, you pay taxes to the Internal Revenue Service (IRS). Conversely, if you are a tax resident in a European country, you pay taxes there. Attempting to set up a US company to avoid paying taxes in your home country is illegal and would jeopardize your business.

Setting Up a US Company as a Foreigner

To properly comply with tax laws, you need to understand the requirements for a US company when you are a foreigner. You must obtain a tax ID number, which is required for US tax declarations. However, this ID does not grant you the right to work in the US, so you cannot receive a salary from a US company in the traditional sense.

The key legal mechanism to transfer funds out of your US company is through dividend distributions or other forms of owner payouts. These distributions are considered income for you, and you are responsible for declaring and paying taxes on these earnings in your home country. International tax treaties can help mitigate the issue of double taxation, where you might have to pay taxes on the same income in both countries. However, if the tax rate in your home country is higher than in the US, you may still need to pay the difference, along with applicable social charges.

Seeking Legal and Financial Advice

Navigating these complexities requires professional advice. It is highly recommended to consult with an attorney and/or a tax advisor who is familiar with both domestic and international taxation laws. Some useful resources can be found on my Foreign Countries page, which provides a list of reputable professionals capable of guiding you through these intricate tax landscapes.

Please note that seeking advice from a lawyer and/or accountant is essential for a comprehensive evaluation of your tax situation. This legal guidance is not a substitute for professional advice and does not create an attorney-client relationship. Ensuring full compliance with tax laws is crucial to protect your business and avoid potential legal issues.

Conclusion

Being a European founder of a US startup involves navigating a complex web of tax obligations. By understanding the legal and financial implications, you can ensure that you meet your obligations and operate your business effectively. Consulting with a professional tax advisor and lawyer is the best way to navigate this intricate landscape.