Pay close attention to U.S. tax laws even if you live and run your business overseas
One of the perks of being an entrepreneur or self-employed worker is that you can live and work from anywhere, including other countries. However, taxes still need to be filed in the U.S., even if you’re living and working on growing your business overseas.
Here are tips and important information to know when filing taxes in the U.S. as an ex-pat entrepreneur.
Self-employed general tax requirements
First, let’s cover the basics of self-employment taxes that you’d have to pay whether living here or abroad. If you make over $400 in a given year, you must file a tax return that includes Schedules C and C-EZ. There are two components that make up the self-employment tax rate of 15.3 percent: 12.4 percent for social security and 2.9 percent for Medicare. These payments would normally be taken out of your pay check if you worked for an employer.
Self-employed professionals also must pay quarterly tax payments that are estimated taxes owed. Without paying quarterly taxes, or the adequate amounts on these quarterly payments, penalties may be incurred when you file your annual tax return.
Now that you know these basics of what self-employment taxes entail, let’s look at what’s different for those living outside of the U.S.
Taxes for ex-pats
The U.S. taxes its citizens even if they’ve lived outside of the country for years. Income received when working from any country must be reported.
However, the Foreign Earned income Exclusion (FEIE) allows qualifying ex-pats to make around $100,000 a year without having to pay any income taxes. This applies to many working people living abroad. Additionally, if you’re paying income tax wherever you live (outside of the U.S.), these tax payments can be considered credits on your taxes. But this doesn’t apply to income from things like interest, dividends, or social security payments, among others.
Remember that where you live matters. Some countries outside of the U.S. will not charge business tax, while others could be as high as 40 percent.
Another positive for the self-employed is the deductions. And ex-pat entrepreneurs can take advantage of reporting expenses for business-related things like travel expenses, supplies, rent, and taxes. These deductions help to offset the tax burden on entrepreneurs.
Many ex-pats may do business with vendors in countries outside of the U.S. There are tax laws that apply in these cases, including withholding rules and procedures. One rule is that vendors should file out a W-8 to keep on file, which can also be used to justify a withholding rate or an exemption.
Type of business
Entrepreneurs’ taxes are affected by what kind of business structure is set up; for instance, an LLC (limited liability company). For a foreign LLC, Forms 8832 and 8858 must be filed each year for the LLC to be “disregarded,” which means that the company can be reported on your individual tax return and it doesn’t require separate corporate reporting.
There is also a repatriation tax that is paid by U.S. citizens who are owners of foreign businesses.
FATCA, which is the Foreign Account Tax Compliance Act, indicates that the IRS can enforce taxes on transactions that don’t take place in the U.S. This could include passive foreign income or subpart F income, and a controlled foreign corporation that gets more than 75 percent of its income from dividends or royalties and the like is then considered a Passive Foreign Investment Company.
Wherever you’re living, be aware that certain tax benefits in the U.S. could be eliminated or changed because of local taxation. For instance, retirement plan tax benefits could be reduced because of the interactions of local laws with U.S. laws. Some bilateral tax treaties determine whether or not ex-pats have to pay the self-employment tax as well. This is because some countries will allow the ex-pat to pay a similar tax in their country, so the American citizen wouldn’t have to pay both. This also means that ex-pats could take advantage of retirement benefits in the country where they’re living and running their business as well.
Many analysts suggest that ex-pats don’t incorporate their businesses overseas because of the complexities of filing their taxes and hidden fees, among other reasons.
Another important point is that the Foreign Bank Account Report (FBAR) requires ex-pats to file FBAR if they have over $10,000 in their foreign bank account. This applies even if separate accounts don’t equal $10,000 on their own but do if combined. FBAR isn’t something that is filed with the IRS—it is an electronically filed report with the Treasury Department.
It’s always smart to sit down with a tax professional to ensure that all laws and regulations are being followed to avoid penalties and headaches. Provident CPA & Business Advisors is here to help you navigate guidelines and file taxes wisely—no matter where you live and work.