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Hi. I am a South African based in the US. I am here on a foreign…

Hi. I am a South...
Hi. I am a South African based in the US. I am here on a foreign media visa, an I-Visa. Essentially, I have to file my taxes here but I am not allowed to work for US companies. I also have a NY State registered LLC. I have just been offered a 3-year contract by a South African company and the remuneration is $66,529 per annum. Still negotiating for more though. Someone told me that it would be best for tax purpose to sign the new contract through my LLC rather than as an individual. I will be responsible for getting my own health insurance, taking care of my pension fund and also paying my own taxes. What would you recommend I do?
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Answered in 9 minutes by:
7/3/2012
R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 3,375
Experience: Over 20 Years experience
Verified

Randalltax :

I'm not sure what benefit having you earn money through an LLC versus as a sole proprietor would bring you.

Randalltax :

In the US, an LLC owned by one person has the choice of being taxed as a corporation, as a "pass through" corporation (known as an S-Corporation), or as an "ignored entity". Most people choose the ignored entity. The only purpose of the LLC at that point is that it gives certain legal protections, but not much. Taxwise, whether you run your business through an LLC as an ignored entity or run it as a sole proprietorship without an LLC has absolutely ZERO tax difference on the federal level. On the state level, your LLC may be subject to additional tax or annual fee that you would not have without the LLC.

Randalltax :

Based on the proposed income, and one that you are likely to need all of the proceeds for your personal living expenses, there is no benefit at all to having your LLC taxed as a Corporation or S-Corporation from a tax standpoint.

Randalltax :

In both cases, you would have an additional cost to prepare a more complicated business tax return, in addition to your personal returns.

Customer:

So then it sounds like it makes sense to just do it as an individual.

Randalltax :

There are only 2 reasons to use an entity: 1) Legal protection and 2) tax protection. I see no benefit in your case to tax protection, so unless you speak with an attorney who suggests the legal protection of an entity, I would not recommend messing with the LLC.

Customer:

Okay, I get you. Since I am not an American, what taxes would I be liable for? Federal and state only, right? I wouldn't have to contribute to social security, right?

Randalltax :

You would need to pay into the Social Security and Medicare system. There is no exemption that I know of for your type of visa. There are exceptions for student visas.

Randalltax :

Most countries have a treaty with the US such that benefits paid for here may accrue in your home country.

Customer:

Really? But I don't qualify for Social Security or Medicare since I am not a permanent resident, so why on earth do I pay into those?

Randalltax :

The standard response is "It's the law".

Randalltax :

But, like I said, many countries recognize the contribution and it accrues to your benefit in your home country.

Randalltax :

It's not an optional contribution.

Customer:

Since I am here indefinitely, there is absolutely no benefit in me paying towards those systems cos I live here and receive no benefits in South Africa.

Randalltax :

You can argue that point with the South African government.

Customer:

Any idea, ball park, how much I am looking at?

Randalltax :

If you are self-employed

Randalltax :

sorry...

Randalltax :

Social Security is 6.2% and Medicare is 1.45%

Customer:

Since the company I will be working for is not recognised as an employer in the US, I am considered an independent contractor, therefore self-employed.

Randalltax :

If you are self-employed, then the employer must match these amounts. So you pay double, or a total of 14.65%

Randalltax :

this year is the last year of a special 2% discount on SS for employees only.

Randalltax :

So this year it is 12.65% total

Customer:

Oh my goodness. So 25% to the IRS and this 14.65%. PLUS I still have to pay NJ State tax?

Customer:

So this 14.65% is just for SS?

Randalltax :

SS & Medicare are taxes, but they are not considered part of the "income tax"

Customer:

Right, I get that.

Randalltax :

the 25% federal rate on income is not a flat rate. Your effective rate is likely much lower. And it is on NET income after expenses if you are self-employed, not on gross income.

Customer:

Aaaah. Okay. Phew.

Randalltax :

So if you are paid $65K on a contract basis and after expenses you net 35K, you pay income tax and MCare and SS on the net 35K

Randalltax :

It's not like a VAT

Customer:

Oh okay, I get you.

Randalltax :

And yes, NJ tax on top.

Customer:

Do you know how much that would be, roughly for me?

Customer:

I need these numbers to negotiate the offer.

Randalltax :

Are you single? Have any dependents?

Randalltax :

How much do you think your net income will be?

Customer:

Single. Have a 14yo daughter and one on the way, due in November.

Randalltax :

Hopefully that implies you are female :)

Randalltax :

Are the children staying with you in the US?

Customer:

LOL! Yes, I am female.

Customer:

Yes, my daughter is here with me and son will be here, too.

Randalltax :

OK. So we would probably guess that you are going to be considered Head of Household with 2 dependents, both under 16 in 2012.

Randalltax :

So what is your best guess of after-expense income?

Customer:

Still trying to work it out

Customer:

But I have other income of $23000 currently and combining it with the new $66529, my gross annual is $89529.

Randalltax :

Well, without an accurate picture of taxable income, providing a range of tax would be virtually impossible.

Randalltax :

Too many factors.

Customer:

Just a second please

Randalltax :

The other $24K is what kind of income?

Customer:

I'm a columnist for a newspaper in SA. Also independent contractor

Randalltax :

Is that a salary with taxes deducted? Or more self-employment (contract) pay?

Customer:

Contract pay. I'm responsible for the tax with that, too.

Customer:

I haven't filed taxes yet though cos I was waiting to hear back from tax authorities in South Africa whether I should be paying tax here or there. Just recently been told that I file taxes here. SA has a tax treaty with the US to avoid double taxation.

Randalltax :

OK, so just guessing at $5K in expenses, that nets you about 85K.

Randalltax :

With $85K net, your tax will be around $18K - 20K for all taxes, federal, state, and SS/Medicare with 2 children.

Randalltax :

Comparison: If instead the 65K was paid as $60K in salary.not on contract basis, your total taxes for the year would be around: $500-1000 higher.

Customer:

I pay $2000 rent a month, so my expenses are much more than that. My estimate is more or less $30K for annual expenses.

Randalltax :

Rent is not deductible under either scenario

Customer:

I can't list my rent as an expense?

Customer:

What are my expenses then?

Randalltax :

If your job assignment is 1 year or more or likely to be more than 1 year, all travel expenses in the local area are not allowed.

Randalltax :

You might have expenses like internet, computing, out-of-your home area travel, pencils, office supplies

Customer:

Oh, I see. Not living expenses. I was busy calculating living expenses. SMH.

Randalltax :

If you are in NYC and do all your work in the NY/MJ area, then your travel is not deductible

Customer:

What? That sux. Why not? So I can't deduct cab rides to meetings etc?

Randalltax :

Nope.

Randalltax :

With the possible exception of....

Randalltax :

local travel if you are working from a home office and visiting people for interviews....yes that is deductible expenses

Randalltax :

I typed the Nope too soon

Customer:

Well yes, I do work from hom.

Customer:

home

Randalltax :

You should keep the receipts, and more importantly, a record of WHOM you visiting and the BUSINESS PURPOSE of the trip.

Randalltax :

A monthly subway pass would not be deductible because it is general transportation.

Customer:

Okay, I see.

Randalltax :

Remember that a $10 cab ride deduction only saves you about $3 in tax, so don't be taking taxis just because you get a deduction. You will still spend more than taking a subway if those are options.

Customer:

Okay, that makes sense.

Customer:

I think I will need to find someone to help with tax filing cos this is just too complicated for me.

Customer:

How much did you estimate my state tax would be? I live in Jersey City, NJ but all my meetings are in Manhattan.

Randalltax :

For a first-time tax filer in your situation, YES, I would definitely recommend hiring a tax pro. And not necessarily the street corner kind.

Randalltax :

Oh, aren't you lucky!

Randalltax :

You get to file and pay New York taxes!

Randalltax :

AND New Jersey, too!

Randalltax :

You have to keep track of all days worked in NY

Randalltax :

However, NJ gives you a credit for tax paid to NY so you are not double-taxed.

Customer:

But why would I have to pay NY tax as an individual?

Randalltax :

Figure between 4% and 7% for state level.

Randalltax :

New York laws! If you WORK in NY State, you pay tax there.

Randalltax :

If you play one baseball game in Yankee Stadium, you pay tax on a fraction of your income!

Randalltax :

Even if you play for Texas.

Customer:

I don't really work there though cos I have a home office in Jersey City. I just go there to meet with people. My LLC (which is yet to do any business) is registered in NYS.

Randalltax :

New York technically counts ANY day or part of a day you work in their state to be a day worked in their state. I am not sure how they would prove that you came into the city and left the same day, but that's the law in a nutshell.

Randalltax :

If you were to be there Mon-Fri 8am to 5pm for a whole week, that is 5 days working in NY.

Randalltax :

If you are there Tuesday from 8am to 10am, that is one day.

Customer:

No way! That's crazy. Well, don't think there is any way for them to prove I was there. All I'm doing is meeting people in restaurants.

Customer:

Where are you based, Randall?

Randalltax :

There's a difference between the technical side of the law and the realities of taxes.

Customer:

Thank goodness for that.

Randalltax :

Example: a winning lottery ticket for $2 is taxable income. No question about it.

Randalltax :

How many people listed their $2 winning lottery tickets on their tax returns last year?

Customer:

LOL! That's crazy.

Randalltax :

Really!

Randalltax :

I am in Texas. I actually have several Wall Street financial advisors as clients.

Customer:

Wonderful.

Randalltax :

About half live in NJ and take the ferry to downtown

Randalltax :

Some of these guys pay in taxes what I make in a year

Customer:

Yeah. A lot of people that work on Wall Street live near me in downtown Jersey City and on the water front.

Randalltax :

And I do pretty OK.

Customer:

Yikes. That must be a lot!!

Randalltax :

There's a lot of money in taking other people's money!

Customer:

SMH.

Randalltax :

OH well...the phone rings....good luck!

Customer:

So, would you be able to recommend a tax specialist that can help me file taxes? I have lived here since August 1, 2010 and have yet to file taxes cos I didn't know where I was supposed to pay my taxes and the SA Revenue Service was taking forever getting back to me. I'm probably liable for some penalties by now. Oh dear God :-(

Randalltax :

As much as I would like to make a recommendation, the forum prohibits that. Look for an Enrolled Agent (federally licensed tax specialist) or a CPA.

Customer:

Okay, no problem, will do that.

Randalltax :

Your 2011 return is overdue unless you filed an extension. Taxes were due 4/15 whether an extension was filed or not

Customer:

Didn't file anything.

Randalltax :

Of course, if you can find me on Google....

Customer:

Will find you on Google...

Customer:

Thank you, Randall.

Randalltax :

Have a great day!

R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 3,375
Experience: Over 20 Years experience
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