Expat entrepreneurs who are thinking of starting a business overseas should expect another layer of complication to their expat taxes. Fortunately, that’s no reason to abandon your career dreams! Read our tips first to ensure you understand all the implications for your self-employment taxes.
Filing Requirements for Self-Employment Taxes
The thresholds for triggering a filing requirement are different for expats who are self-employed. If you earn more than $400 in a year, you will be required to file a tax return. Along with the tax return, plan to file a Schedule C or Schedule C-EZ. The rate for self-employment taxes is 15.3%. 12.4% covers Social Security, and 2.9% goes toward Medicare. Further, if you are a high earner you could be subject to additional Medicare taxes; the threshold is $250,000 in income for those who are married filing jointly, and $200,000 for single filers. Medicare tax does not have a limit, but only the first $128,400 of your income will be subject to Social Security tax. Pro tip: determine if you need to make estimated payments so that you don’t end up with an underpayment penalty at the end of the year!
Consider Your Location
A major factor in the amount of self-employment taxes you may owe is which host country you reside. Not only do the deadlines differ greatly, so does the amount of tax you owe on your business. If you live in the United Arab Emirates, you would not owe corporate taxes at all. However, in other countries, you may pay upwards of 40%!
Deductions for Ordinary and Necessary Expenses
Appropriate business expenses can be deducted to help alleviate the burden that self-employment taxes can have on expats. For example, the following expenses are often deducted using the Schedule C:
- Legal and professional services
- Car expenses
- Rent, including both business space and equipment
- Taxes and licenses
- Meals and entertainment
However, you should also be aware of the limits to these deductions. For instance, you will pay the self-employment taxes before you can apply the Foreign Earned Income Exclusion or the Foreign Tax Credit.
Don’t Forget About FBAR
The Foreign Bank Account Report (FBAR) is a critical component of self-employment tax for expats. If you have $10,000 or more in your foreign bank accounts (combined!), you will need to file FBAR. Have two accounts with $5,000 or more each in them? That means you need to file, even if those are your personal accounts. Skipping this step can result in steep penalties for those who are caught!
Corporate Structure Affects Self-Employment Taxes
The type of business you set up can have a significant impact on your taxes. The most common type is the LLC – a limited liability company. Domestic LLCs are automatically considered “disregarded” which means that you can report this company on your individual tax return. However, for a foreign LLC to be considered “disregarded,” you must file Form 8832 once and then file Form 8858 annually. If you don’t or can’t choose to have your LLC disregarded, you’ll need to fill out Form 5471, which is a much more onerous undertaking. And lastly, depending on your ownership in the company, you may be subject to the Repatriation Tax, a one-time tax for US owners of foreign businesses. However, if you’re considering starting a new company, this would not apply to you.