The Overseas Self-Employed Tax Return for Taxpayers Abroad

Self-Employed Tax Return Overview for Taxpayers Abroad

At some point during a US person’s career, they may want to throw off the shackles of a 9-to-5 and launch their own business. As the old saying goes for entrepreneurs, entrepreneurs work a 90-hour week so they don’ t have to work a 40-hour week. But, with the excitement of owning your own business comes the headache of handling the bookkeeping and tax aspects of operating a small business. When a person has to complete a tax return and they are self-employed, there are many twists and turns they have to consider and overall, the return can be much more complicated than when they were W-2 employee. It will get infinitely more complicated when a person is operating a self-employed business abroad.  Let’s review five important facts about preparing a tax return my person is considered self-employed.

What is the Person’s Status Abroad?

One of the first most important issues, is what is the status of the entity abroad. For example, is it something similar to an LLC in the United States such as a PTY LTD in Australia or is it closer to a foreign corporation such as a US C Corp. If the entity has already been disregarded overseas that does not mean that it is automatically disregarded for US tax purposes, and may require forms 8832/8858.

Per Se Corporation (Sociedad Anonima)

Sometimes, a foreign corporation does not have the opportunity to become disregarded for US tax purposes, because the corporation is considered a per se corporation under US tax law. For example, in many countries, a common entity formation is the Sociedad Anonima (S.A.). And while the S.A. may be created for purposes such as asset protection and not specifically as a foreign corporation operating a business, from a US tax perspective the taxpayer has to report it as a corporation and a Form 5471 may be required.

Is it Disregarded for US Tax Purposes (Form 8832/8858)

Depending on how the check the box rules apply to a specific foreign entity type, the taxpayer may want to disregard the entity for US tax purposes. This may require the filing of one or multiple forms depending on the specific type of entity structure. By disregarding the entity, the taxpayer may have a more immediate tax liability depending on how much income was generated in the company — although it will eliminate the necessity of filing certain (more complex) international tax forms.

Totalization Agreement to Reduce Double Self-Employment

The United States has entered into totalization agreement with various different countries. The purpose of the totalization agreement is to minimize double contributions into Social Security systems of different countries. Thus, if the taxpayer operates in a country that has a totalization agreement and they may be able to circumvent happy to contribute to the US Social Security and instead will contribute to the foreign country’s Social Security.

Schedule C for Business Income and Deductions

Once a person has a disregarded entity, they will report their income and expenses on IRS Form 1040, Schedule C.  Schedule C is filed in lieu of other more complicated corporate/partnership reporting form such as the forms 1120 or 1065 — although there may be an annual form 8858 for disregarded entity reporting requirement.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.