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Ask Dr. Fiona Chen Your Own Question
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 355
Experience:  Former IRS Revenue Agent
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I am exploring ways to minimize taxes. I am an amercian

Customer Question

Hi, I am exploring ways to minimize taxes. I am an amercian citizen, but reside outside of the USA for almost all of the year - and I will pass the foreign presence test so that the first 100K of my income will not have income tax in my personal tax returns to the USA. I do free lance consulting and am looking for ways to minimize self employment tax. If I open my own company as a British LLP and pay myself from those profits of the British LLP, and I do not live in either the USA or the UK, will I have to pay self employment taxes in the USA on that income?
JA: The Accountant will know how to help. Is there anything else important you think the Accountant should know?
Customer: that should cover everything.
Submitted: 2 months ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 2 months ago.

Hello! My name is***** to JustAnswer. I'm reviewing your question now, and will post back with your reply momentarily.

Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

1) To qualify for foreign income and housing exemption exclusion, we need to have foreign earned income. It is more than we are in terms of residency. Therefore, you may need to consult with a CPA firm with international presence on the subject. For example, if most of your free lance consulting income is from the U.S., they are U.S. source income.

2) Since you can form company, it is probably best to have on your own tax return, wage income and dividend income. If you have the company, the company can report income tax to that country where it is formed and where it is operating the business and have income.

You can consider the social security and tax treaty agreement the U.S. signed with the various countries you are considering. Therefore, you can decide which country your company should issue your W-2 to you.

3) Unless we are very good at planning, the more countries you are involved with, the more countries' various taxes you may owe. We want them not to tax us, but they want to tax us.

That is, our residency, company and business operating locations, citizenship, source of income, etc. are all bases for us to be taxed by the country. The scope of taxes in each country's tax can be complex including not only income tax, property tax, sales tax. There are country and localities need us to pay consulting service sales tax.

U.S. is taxed with all income world wide. The location of its citizen does not matter. That is probably a recent trend is for citizens to abandon its citizenship. This is not what we are suggesting here.

Please feel free to follow up.

Regards,

Fiona

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Customer: replied 2 months ago.
Hi, I do not think you answered my question.To simplify things - Do I have to pay self employment tax (~15%) to the US government if all of my income is from a British LLP or British Limited company that I am the owner of?
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

Thank you for the reply.

The number 2 of the previous posting exactly answered your question. But allow me to explain it further.

"2) Since you can form company, it is probably best to have on your own tax return, wage income and dividend income. If you have the company, the company can report income tax to that country where it is formed and where it is operating the business and have income.

You can consider the social security and tax treaty agreement the U.S. signed with the various countries you are considering. Therefore, you can decide which country your company should issue your W-2 to you."

Self employment income coming from receiving income on your own. If you have a company and the company receives income for the services you provide, the company owes income tax. The company pays you as an employee of the company. Therefore, you receive W-2 income for wages because you are an employee of the company. The company pays and withhold payroll taxes and income tax on the wages.

The company income other than the wage income paid to you is best in the dividend format. It is the cheapest and clearest way for you to report on your personal tax return.

Then, you don't have self-employment income and no self-employment tax.

Please feel to follow up.

Regards,

Fiona

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