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Foreign Corporation / US Tax Issue: Say I am a US person…

Foreign Corporation / US Tax...
Foreign Corporation / US Tax Issue:Say I am a US person living in New Zealand exclusively as of a few years ago, with no physical presence in the US. I operate as an independent contractor consultant with US clients.Because there is no totalization agreement with NZ, I owe the US self-employment tax on my earnings, even though I qualify for the foreign earned income exclusion to exclude all of my annual earnings from US income tax.If I was to set up a NZ business, and had my US clients pay me in USD, but to a TransferWise.com borderless account* rather than a US bank account, what would that do to my US tax liability? If my NZ company pays me a salary or dividends in NZ, do I owe any US taxes (presuming such earnings are excluded by foreign earned income exclusion)?*Info on the borderless account: https://transferwise.com/us/borderless/
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Answered in 3 hours by:
1/22/2018
Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 6,671
Experience: 20+ years of experience in tax preparation; 30+ years of experience as a real estate/corporate paralegal.
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If you’re an employee of a foreign company (even if it's your own foreign corporation) and have payroll taxes from that country taken out of your pay, you don’t have to also pay social security taxes to the U.S.

As you know, if you are self-employed, however, acting as an independent contractor, then you must file a Schedule C with your U.S. Tax return and pay the appropriate U.S. payroll taxes on your net earnings. The self-employment tax rate is 15.3% and the foreign income exclusion mentioned before does not reduce this liability.

If you do have your own foreign corporation, or have more than a 10% interest in one, you must file a special form, Form 5471, reporting that ownership stake. If that foreign corporation is making profits, you may owe taxes on its earnings.

http://www.irs.gov/pub/irs-pdf/i5471.pdf.

Basically foreign income from any source must be reported to the IRS.

Please let me know if I can assist you further.

Thank you and best regards,

Barb

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Customer reply replied 6 months ago
Barb thank you so much, this is very helpful. Can you tell me whether there is a way to quickly assess whether the taxes I'd be subject to paying on foreign corporate profits is likely to exceed the tax liability I face as an independent contractor in this case?

You're welcome.

The tax reform bill signed in December, 2017 made changes regarding taxation of foreign businesses, and generally, the rate will be 15.5%.

https://www.journalofaccountancy.com/news/2017/dec/tax-reform-bill-changes-for-businesses-201718071.html

http://www.bakerbotts.com/ideas/publications/2017/12/tax-reform-act---international

Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 6,671
Experience: 20+ years of experience in tax preparation; 30+ years of experience as a real estate/corporate paralegal.
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