For all you US citizens, thinking of moving overseas and doing some type of self-employed work, this is how I arranged everything before I left. Keep in mind; I’m not a lawyer or accountant. I did hire professionals to make sure everything is legal, and works well for me. However, don’t treat this article as legal or financial advice. Hire your own advisors and have them help you set up everything properly.
Create a US LLC
Since I was going to be doing work for US clients, it was easiest to set up a US corporation. That way, they don’t need to worry about any problems paying a foreign company (which may become a problem in 2013, when parts of the HIRE Act start).
With an LLC you can take your personal income from it as earned income (wages) or unearned income (distributions). If you take your pay as earned income, you may be able to use the Foreign Earned Income Exclusion (FEIE). This lets you earn your first $92,000 (approximately) free of federal taxes. Since I was living in Texas, a state without income taxes, I don’t have any state income tax to pay. However, since I earn the money as wages, I do need to pay the FICA – both halve (employer and employee). This comes to around 15% of my wages.
I set up the LLC in Nevada, but you could probably pick any of the states that traditionally are good for incorporating, like Delaware.
Get a US address for the company
I needed an address in the US, since my client was going to be sending me a check. If you have someone you can trust, you can see if they will let you use their address. I created an account at Earth Class Mail (read more of my comments about them in my Earth Class Mail review). This gave me a way to get mail, including checks, which I have deposited into my bank account.
Your company will also need a registered agent in the state where it is incorporated. The accountant I used to form the corporation provided this service at a reasonable fee.
Get a US bank account for your company
Once you have your corporation, you’ll need a bank account. If you incorporated in a state where you aren’t living, this may be a little difficult.
When I went to my bank in Texas, they said that they would only open an account for my corporation if I had filed in Texas as a foreign corporation. That isn’t because I planned to move overseas, it was because the company was registered in another state. This filing would have cost me a few hundred dollars.
I really didn’t want to fly to Nevada, just to open up a bank account. So I called a bank in Nevada that had branches in Nevada and Texas. They let me set up everything over the phone, then go into a branch of their bank in my neighborhood to show them my ID and make the initial deposit.
I also opened a personal account at the bank, and tied the two together. That way, I can pay myself by doing a simple online transfer from my company account to my personal account. When I need to get money from my personal account, to pay my bills overseas, I can just go to the local ATM overseas and make a withdrawal.
Get a US phone number
For this, I used Skype. To see the steps I did for this, go to my Skype review.
You can set up a Skype phone number to forward to your phone wherever you are. If anyone calls my US phone number, they are forwarded to my cell phone in Paraguay.
Now you’re ready for business
At this point, you have everything in place to start running your business. Getting clients and performing the work is all up to you.
The tax benefits of working for your own company overseas
With all of this in place, you can work for clients back home and get your money in whichever country you’re currently living in. You may also be able to take advantage of the FEIE. You can’t use the FEIE if your income is from passive sources, like dividends, interest, gambling winnings, etc.
To use the FEIE, you need to either be outside of the US for 330 days of the year (the Physical Presence test), or you need to prove that you are a tax resident elsewhere (the Bona Fide Resident test). Since the Bona Fide Resident test is a bit arbitrary – the IRS can say you don’t qualify if you still own a home, or have other ties, back in the US – I go with the Physical Presence test.
If you leave the country in the middle of the calendar year, you still may be able to qualify for being outside the US for 330 days. You can file a form 2350, which lets you file your taxes late, for the sole purpose of qualifying for the FEIE. Even without this extension, people living overseas get an automatic two-month extension to file their taxes, and you can always file a form 4868 for four more months. Just remember, even though you can file later, the payment is still considered to be due on the normal date. Interest will accumulate, if it turns out you need to make a payment to the IRS.
You can read more information about US taxes for people living overseas here http://www.irs.gov/businesses/small/international/article/0,,id=97130,00.html and http://www.irs.gov/publications/p54/index.html.
Just in case the $92,000 exclusion isn’t enough for you, there is also a deduction you can take for living expenses. It’s around $14,000, more if you’re living in very expensive cities like Hong Kong, Moscow, etc.
If you want to eliminate the FICA payment too, you could set up a foreign corporation, and be paid through that. However, there is a lot more paperwork involved with a US citizen owning a foreign corporation. I figured that you’d need to be making somewhere around $30,000 to $40,000 before the expenses of the overseas corporation are less than what you’d pay in FICA.
Summary
If you’re looking to have your own company and work overseas, you can use some great, 100% legal loopholes to your advantage. Just make sure you check with a lawyer or accountant who does work for people living overseas already. They can help guide you through the proper steps and make sure you aren’t hit with any surprises later on.
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