Expat Tax Planning: Top 5 Business Tax Questions

Becoming a US expat is an exciting time in your life, but perhaps even more exciting is the fact your opportunities are endless while living abroad. If you’re thinking about running your own business overseas, there are a few key factors you’ll want to take into consideration for the purpose of your US expat taxes. Here are the top five questions and answers you should know about expat tax planning when it comes to owning a business abroad.

1. I own a business and all of my income is from the US, though I am living abroad. How does the tax return process work in this scenario?

Fortunately for US expats, even if all of your income is earned in the US, you can still qualify for most of the exclusions and credits available to Americans living abroad with careful expat tax planning. This is because technically you are earning your income outside of the US while living overseas, which means it qualifies as “foreign earned income.” As such, you could use the Foreign Earned Income Exclusion and/or the Foreign Tax Credit to save money on your US expatriate tax return.

2. Will I need to pay Social Security or FICA taxes if I run a business overseas? 

This will come down to the structure of your company and where it is located:

  • Sole Proprietorship or US-based Business Entity? You will most likely need to pay US FICA taxes, which is 15.3% of your income. This would apply before you can use the Foreign Earned Income Exclusion, so you may have a cash expense.
  • Foreign-based Business Entity? You will not likely need to pay US Social Security or FICA taxes. However, if you’re in a country that has a tax treaty with the US, you should consult the treaty to see how and to whom these taxes would apply.

In any event, if you must pay Social Security or FICA taxes, they would generally need to be paid quarterly throughout the year as part of your expat tax planning process.

3. How do self-employment taxes work in a country without a totalization agreement in place?

Unfortunately, double taxation is quite common for those who are self-employed and living in a place without a US totalization agreement in place (view the full list of US totalization agreements here). This is because you’ll need to pay self-employment taxes to the US even though you’ve already paid them to your host country.

Fortunately, there are a number of deductions that US expats can take, which will hopefully limit your tax liability as much as possible. It’s a good idea to consult with a professional to begin your expat tax planning, so you can be sure you’re taking advantage of all the savings available to you.

4. As a business owner overseas, will I be subject to foreign financial account reporting?

Both FATCA Form 8938 and the Foreign Bank Account Report (FBAR) must be filed if financial accounts with US owners exceed the respective filing thresholds:

  • Form 8938: The filing threshold for this form starts at $200,000 for US expats and goes up to $600,000, depending on filing status. Learn more about FATCA filing requirements here.
  • FBAR: You must file FBAR if your foreign bank accounts exceed $10,000 at any point during the year.

Note that in addition to accounts owned by US persons, any US person with a signature authority over a bank account must report the account to the US Treasury Department as well.

5. Do I need to pay estimated taxes?

Since the US is a “pay as you earn” system, you will need to pay your taxes as you earn income throughout the year. Generally, W2 employees pay their taxes through withholding, but if you do not do that or you have a different pay arrangement, you may need to make estimated tax payments. These are prepayments of your US taxes, usually made in 4 quarterly payments each year.

  • If you expect to owe taxes when you file your expat tax return, and you don’t have enough tax being withheld from your income, you may need to make estimated tax payments in order to avoid IRS penalties.
  • If you own a business outside the US and expect to owe taxes (income or self-employment taxes) to the IRS when you file your expat tax return, you may need to make estimated payments to the IRS.

Fortunately, there are provisions for foreign businesses, such as the Foreign Tax Credit, which can help prevent you from having to pay US expat taxes. You should consult with an expat tax professional to ensure you don’t miss any opportunities to save money on your expat tax return! Download a US expat tax guide for more money-saving tips for your expatriate tax return.

Need Help Filing Your Business Taxes While Living Overseas?

Our team of expat-expert CPAs and IRS Enrolled Agents are here to help by providing the tax expertise you’re looking for when it comes to your business’s expat taxes. Get started with us today for a hassle-free expatriate tax experience.

Free Guide: The 25 Things Every Expat Needs to Know About Taxes

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