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Expat Women: Business Finances for Expat Women Entrepreneurs: Corporate Structures, Expat Taxes and Retirement Planning

Business Finances for Expat Women Entrepreneurs:
Corporate Structures, Expat Taxes and Retirement Planning

David McKeegan, MBA, EA


In the exciting world we live in, modern technology and the ready availability of high speed Internet make packing up your business both a possibility and a reality for many people. However, even in this new world of mobile business, we are all still bound by some of the same issues that brick and mortar entrepreneurial ventures and small businesses need to deal with – such as taxes, liability, and savings for retirement. In many cases, the way a business is established (that is, the corporate entity) will have a profound impact on how you are taxed and what liabilities risk you carry.

Due to my area of expertise, this article focuses in on examples related to the United States. Yet regardless of your nationality, I hope that it also helps to answer similar questions you might have with regards to your non-U.S.-related business as well.

 
Establishing Your Business: Business Structure Types and Key Features

How and where you set up your business entity will be largely dependent on how long you plan to live in your particular country of residence. If you have settled offshore permanently, establishing your business in your host country might be an appealing option. However, if you are planning on being abroad for just a few years – not forever – or you plan on living in multiple countries abroad, you may want to incorporate in your home country (depending on rules in your home country, of course). If you are an American entrepreneur specifically, despite operating your business in a foreign country, you may want to establish your business as a U.S. entity.

U.S. business entities fall largely into two camps – those that hold the owner liable (such as a Partnership or a Sole-proprietorship) and those that do not (such as a Limited Liability Company or a Corporation).

Important: As a U.S. citizen, regardless of how your company is established, you will still need to report your personal earnings from the business to the U.S. via your U.S. expat taxes. Depending on how you establish your business you have some control, however, in how this income will be reported and taxed on your personal tax return.

 
Liability Protection
Profits Taxed At
Self-Employment Tax Payable
Cost of Establishing and Maintaining
 Sole Proprietor
No
Individual Rate
Yes
Low
 Partnership
No
Individual Rate
Yes
Low
 Limited Liability
 Company
Yes
Individual Rate
Maybe – for an S Corp on the
salary portion
Medium
 Corporation
Yes
Corporate Rate
No
High


Reporting Requirements for Your Foreign Business

Establishing your business in a foreign country will make you subject to that particular country's reporting requirements. It is important to keep in mind that each country has its own tax deadline. This can become a challenge if your foreign business tax return is due on a date significantly different than the due date of your U.S. expat tax return, for example. Be sure to check with a tax advisor in both your host country and your home country, to determine the tax filing requirements for your business.

Some countries require you to file U.S. taxes back at home even if you are also filing in your country of residence. For example, if you are a U.S. citizen, you will also need to report your income to the IRS. How you have chosen to establish your business will have an impact on your U.S. expat tax reporting requirements in the United States.

Also keep in mind that every U.S. citizen who has financial authority in foreign bank account(s) with cumulative balances totaling more than $10,000 USD must report this information to the IRS by June 30 of each year. This includes business owners who have signature authority over foreign bank accounts for these businesses – and even for their local expat club!


Other Taxes: Social Security and Medicare Taxes

Taxes on state-sponsored benefits, such as social security and Medicare, also need to be taken into consideration. For example, for Americans, the Social Security Administration requires that U.S. citizens working abroad pay Social Security and Medicare taxes on the income that they have earned worldwide via their U.S. expat taxes.

Other countries have similar rules regarding their social security equivalents and the residents of their country. For example, the United Kingdom requires that residents pay National Insurance (their equivalent of social security) on the income they have earned abroad as well.


Double Taxation

To eliminate double taxation of social security and equivalents, the United States has entered into Totalization Agreements with 24 different countries (including the United Kingdom). Be sure to check with your tax advisor to determine how to take advantage of these Totalization Agreements on your U.S. expat taxes.

Note: The US–UK agreement requires that you opt out of U.S. Social Security otherwise you may need to pay twice! If you think that impacts you, do check the U.S. Social Security website for more information.


Payroll Taxes

As a business owner, you may want to be aware of the requirements not only for yourself, but also for your employees. For example, U.S. employees are required to report and pay taxes on their worldwide income. This means that you, as their employer, are required to meet the same reporting requirements as other U.S.-based businesses. Many employers elect to stop income tax withholding on their employees once they move abroad, assuming that the majority of their income will be excluded through the foreign earned income or housing exclusions on their U.S. expat taxes. However, these wages still need to be reported and the associated payroll taxes should still be paid quarterly. Keeping current on the payroll reporting requirements ensures that your employees are not surprised by double taxation and that your company will receive the associated deduction in the current tax year.

As an employer, you can avoid your quarterly payroll reporting and withholding requirements by treating your U.S. based service providers as independent contractors. As an employer, this benefits you because you do not have to withhold or pay taxes on the service provider, and your quarterly reporting requirement is reduced to an annual requirement. However, as a contractor, the service provider then becomes responsible for paying self-employment tax on their personal U.S. expat taxes, and will likely be required to make quarterly estimated payments on their personal taxes. The IRS also requires that service providers treated as independent contractors have control over their work schedule and approach, which may not fit into your business.


Planning For Retirement: Where And How Should You Set Up Your Retirement Plan?

Women as a group tend to have lower amounts saved for retirement than men. Studies have shown that there are two key reasons for this – women take more time out of the workforce (usually, to raise children) and women still do not always make the same amount of money as men, even for the same job. This can cause some real problems when it comes time to retire. Business owners often make the mistake of thinking that their business is their retirement savings (the same way many people felt about their homes until real-estate prices dropped sharply in 2008-10).

The reality is many small businesses do not have a great resale value because they are too reliant on the business owners. So do not assume your business will provide you with a windfall profit to retire on. Make sure you take advantage of the savings vehicles available to you as a small business owner.

Specifically, beware of foreign retirement plans that are not sponsored by large companies. This would include things like Individual Savings Plans (ISA's) in the United Kingdom, which look like a U.S. IRA's to normal people, but to the IRS they are viewed as foreign trusts, which means they lose their tax deferred status in the United States and raise all sorts of red flags with the IRS.


Summary

In summary, as a woman entrepreneur or small business owner working abroad, it pays to consider some of these issues upfront in setting up your business. That way, you can avoid spending time solving problems related to your taxes or corporation set up and focus where it matters most: on your business and enjoying your life as an expatriate.
 

David McKeegan, MBA, EA, Director of Greenback Expat Tax Services. Greenback Expat Tax Services specializes in preparation of U.S. expat taxes for Americans living abroad. Incorporated in New York, Greenback's CPAs have 30+ years specialist experience in U.S. expat taxes. Greenback offers flat fee pricing (US$329 for a federal return); a simple, hassle-free process; and most importantly, CPAs who are experts in the ins-and-outs of U.S. expat taxes. For more information and to download a free guide to U.S. expat taxes, please visit www.greenbacktaxservices.com.

Disclaimer: All information is correct as at April 2011, the time it was written.
 
 
June 2011
 
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