This is a challenge for a tax expert. I live in the UK and freelance for a US company who pay me via Pay-Pal.

Question

I have no social security number, nor am I entitled to one as I am never in the USA. My employer says he has to withhold tax. As I file a tax return in the UK on all my income, is there any way to get out of this? Is there a UK-US treaty that might exempt my employer from witholding tax. Or perhaps there are laws or rules/exemptions that I am unaware of. I would appreciate an answer with links to any quoted laws, application forms, etc.

Answer 1

You're gonna have to bite the bullet and consult a chartered accountant.  There are a number of issues here.  

If you're truly freelance, you're not an employee, and so, no taxes should be withheld from your pay.

Answer 2

You should apply for an Individual Tax Identifying Number http://www.irs.gov/pub/irs-pdf/fw7.pdf and file Form 1040-NR on your US source income.  A tax return preparer where you are should be able to sort out the US and UK income and taxes.

Your employer should provide you with IRS Form 1042-S detailing your earnings and the amount withheld.

Answer 3

You're not an employee. You're an independent contrator in this case and solely responsible for your own income taxes in the US if any. So, the business or company does not have the right to withhold taxes on your income.

Answer 4

Unless you are a part owner of the US business, you do NOT pay US income taxes on the income.  This income is not "effectively connected" to the US.  The company should not be withholding any taxes from this pay.