For US expats, trying to navigate American expat taxes can be daunting enough, but add to that the complicated nature of owning a small business, and finding the proper resources can be very limited. We’ve compiled a list of the 5 most-asked expat business tax questions to help you get through the foggy landscape that is the US tax system.
1. I am a sole proprietor of a business outside the US. Do I need to file a special form to put my business income and expenses on my personal tax return, or is it an automatic designation?
If you operate a business outside the US, and you have no other partners or owners, you are considered a sole proprietor. If you have not designated your business in another way in the country you are working in, you will automatically be considered a sole proprietor and your business income and expenses will be reported on a Schedule C on your American expat taxes. Your business would be considered a “disregarded entity” by the IRS. This means the IRS does not consider your business a separate taxable entity from your other income and expenses. Your business taxes are paid on your personal tax return.
Some countries offer business structures that give you tax benefits as a sole proprietor. If you choose to use a structured business style (such as a foreign LLC), but you want to keep your business classified as a sole proprietorship in the US, you will need to file Form 8832 with your first US tax return after the change.
If you choose a foreign LLC type business structure, it is important that you don’t add any other members or owners (even your spouse or children) or you will not be able to claim the disregarded entity status with the IRS. You would be classified as a foreign partnership or foreign corporation (depending upon the exact type of entity you have), and would need to file a separate tax return for your business.
2. Do I need to pay estimated taxes?
The US tax system is a “pay as you earn” system. This means that you need to pay your taxes as you earn money throughout the year. Most people with a salary or other type of regular payments throughout the year pay their taxes through withholding. Another way to pay your American expat taxes through the year is with estimated tax payments. Estimated taxes are a prepayment of your US taxes, usually made in 4 payments throughout the tax year. If you expect to owe taxes when you file your tax return, and you don’t have enough tax being withheld from your income during the year, then you may need to make estimated payments in order to avoid penalties from the IRS.
If you own a business outside the US, and expect to owe taxes (either income tax or self-employment taxes) to the IRS when you file, you will need to make estimated tax payments to the IRS.
There are some provisions in the tax code for foreign businesses, including the Foreign Tax Credit, that prevent you from having to pay American expat taxes in the US, but you should check with your tax professional to make sure you don’t need to make any estimated payments before foregoing them.
3. Do I need to pay self-employment taxes on the income from my foreign business?
If you are considered a disregarded entity by the IRS, and file a Schedule C form on your personal tax return, you will be subject to self-employment taxes on your business income. Self-employment taxes are the combined employee and employer portions of the Social Security and Medicare taxes for your business. As a sole proprietor, you are considered to be both the employee and owner, and therefore must pay both sides of the Social Security and Medicare tax.
If you live in a country with a Totalization Agreement (also known as a Social Security Agreement) with the US, you may qualify to only pay social taxes to one country. Here is a list of the countries with a Totalization Agreement with the US:
|United Kingdom||Luxembourg||Slovak Republic|
|Sweden||Greece||Brazil (Pending Approval)|
The Totalization Agreements detail out which country you will pay Social Security type taxes to (either the US or your resident country). If you only need to pay the tax to your resident country, you will be able to exclude the self-employment taxes on your US personal tax return.
4. What forms do I need to file if I go into business with a non-US citizen?
Depending upon what type of business structure you have, you will most likely need to file informational returns for your business if you have foreign (non-US person) partners or co-owners.
If your business is incorporated, you will need to file form 5471 with your American expat taxes each year. This form details out your corporation’s income and expenses, shareholder information and certain transactions between the corporation and the shareholders. There are high penalties for not filing this form in a timely manner! Be sure you have this form attached to your return if needed. Certain types of foreign business structures are automatically considered to be corporations by the IRS. Here is a list of those structures (listed on pages 1-2).
If your business is not incorporated, but there are multiple members (or owners), you will file a Form 8865 with your tax return. This form details out the income and expenses from your business as well as partner information and transactions. You would be considered a partnership if you own a foreign LLC (Limited Liability Company) with more than one member, even if the other member is your wife or child.
5. Will my foreign business be subject to FATCA regulations?
The Foreign Account Tax Compliance Act (FATCA) was designed to prevent the “hiding” of income from the IRS by depositing monies into foreign bank accounts. The wide-flung net of FATCA affects US taxpayers on a personal and business level. FATCA regulations require that US persons file an FBAR form (FinCen Form 114) with the US Treasury every year that their foreign bank accounts total balances reach $10,000 or more at any point during the year. This applies not only to personal bank accounts, but also to business accounts with any US owner. In addition to accounts owned by US persons, any US person who has a signature authority over a bank account needs to report the account to the US Treasury. A signature authority is when a person has the right to sign checks or withdraw funds from a bank account, but is not a direct owner of the account.