The cheapest and fastest way to get someone working for you in the US is to engage them as a contractor. Your Australian company can do this directly, with no US entity and no US payroll setup. They invoice you, they handle their own US taxes, and you keep a contractor agreement on file. It’s a perfectly legitimate way to start.

But there are three traps, and the third is the one Australians almost always miss.

In this article, we walk through misclassification risk, permanent establishment risk, and the state-level trap that catches founders even when they’ve got the federal position right.

Trap one: misclassification

The label “contractor” doesn’t hold if the substance is employment. If the person works your hours, uses your tools and works only for you, the IRS can reclassify them as an employee regardless of what your contract says, and bill you for back taxes, interest and fines.

California applies an even stricter test, the ABC test, where the requirement that the work sit outside your usual business is very hard for a startup to meet.

Trap two: permanent establishment

A contractor who acts as your agent, in particular a salesperson with the authority to close deals, can create a permanent establishment for your Australian company under the Australia-US tax treaty. That pulls your company into the US federal tax net on the profit attributable to that activity.

A back-office or engineering contractor is low risk. A client-facing closer is high risk.

Trap three: states don’t honour the treaty

This is the one that surprises people. The permanent establishment protection above is a federal, treaty-based concept. US states are generally not bound by it, so a contractor physically working in a state, California being the obvious example, can create state-level nexus for income or franchise tax regardless of your federal position.

One contractor in the wrong state can quietly create an obligation for an Australian company that thought it had no US footprint.

What the safe version looks like

A genuinely independent contractor who runs their own business, invoices you, uses their own tools, can work for others and bears their own risk, supported by a proper written contractor agreement. The agreement helps, but it’s the substance that decides the outcome.

Map it before you sign, not after

A contractor is a fine way to begin. Just remember that the moment they start to look like an employee, or start acting as your sales agent, the risk changes character.

Disclaimer: This article is for general informational purposes only and does not constitute financial, legal or tax advice. Please speak with a qualified adviser (hey, that’s us!) before making decisions based on your specific circumstances.