So you decided to outsource yourself — and your small business — to someplace outside the United States with better weather, nicer scenery, and lower overhead. But even though you’ve escaped the typical 9-to-5, Uncle Sam still wants a piece of you.
Here’s a primer on how to deal with the IRS while living and working in a foreign country.
You must file a tax return. If you’re a U.S. citizen who earns money of any kind, you’re obligated to file a U.S. tax return every year, no matter where you are in the world. The United States is the only country that requires citizens to file tax returns even if they’re not earning money domestically. Many expats think this is a huge burden. According to a TIME Magazine article, it’s a leading reason why some American expats are giving up their U.S. citizenship. “I am at a breaking point — being American costs me time [and] money, but mostly aggravation,” one expat said.
Some of your earnings may be exempt. If you meet the requirements for the Foreign Earned Income Exclusion, you may exclude some earnings from your U.S. tax return. For example, if you can demonstrate that you’ve already paid tax on your income in your new country, you’ll qualify for a tax credit for the first $95,000 of your annual income, plus any expenses for foreign housing costs.
However, this can sometimes be a complicated process, Robert Goulder, the editor in chief of international tax publications for the nonprofit group Tax Analysts, told U.S. News and World Report. Goulder says that the IRS may reject the exclusion if the taxpayer doesn’t have appropriate evidence of payment status in his new country. “This often creates timing problems where the taxpayer has yet to receive the necessary documentation by the time the U.S. filing deadline rolls around,” he added.
Unfortunately, owning a business works against you in this scenario: You are required to pay the self-employment tax portion of your tax bill if you earned $400 or more, even if it would otherwise be excluded as foreign earned income, unless the country you’re living in has an income-tax treaty with the United States. (Luckily, many do.)
You may be double-taxed on your earnings. If you’ve established residency in a new country, whether or not your business is based there, you’ll need to pay income tax in most cases (but check with an accountant to be sure). Even so, the U.S. still wants its fair share: You’ll need to pay federal tax on your overseas earnings, and may need to pay state tax as well, depending on what property you own in the U.S., unless you qualify for the exemptions listed above.
You can get an extension. If you owe the U.S. government any money, you’re still meant to pay your taxes by the April 15 deadline; however, as an expatriate, you’re eligible for an automatic two-month extension for filing your tax forms, even without requesting it. If two months isn’t enough time to get your forms in order, you may request another extension of up to six months.
Chances are, you’ll need an accountant. Paying taxes while living and owning a business internationally is a complicated issue, to say the least. To make sure that you don’t run afoul of the law or end up making costly mistakes, hire an accounting firm that has experience dealing with expatriate tax issues to help you through the process.