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Freelancing in the USA

Freelancing in the USA

Old Sep 2nd 2014, 3:08 pm
  #1  
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Default Freelancing in the USA

Hi

Please excuse the length of this post but I wanted to include as much detail as possible. I'm new to this forum and I've had a look around but I couldn't see anything that specifically answered our questions below.

My husband and I will be moving out to California early next year (husband on L1, me on L2) and I would like to continue to work as a freelance medical writer when we move (after I have the EAD). We are hoping to live in the USA for somewhere between 3-5 years, after which we will most likely return to the UK. When we return to the UK I would like to remain a freelancer and I will need a few years of accounts when we apply for a mortgage.

I started freelancing earlier this year and I am currently set up as a UK limited company, taking a small salary at the personal allowance tax limit and then I can take out further money from the company in dividends. I have a UK accountant but they are not familiar with US tax.

Is it possible to remain a UK limited company and work from/reside in the USA? My clients are all UK-based and I would want to continue to bill them in GBP. Am I correct in thinking that as a UK limited company I would continue to pay corporation tax in the UK and then my personal income (salary and dividends) would be taxed by the USA (and not the UK due to the double taxation treaty)? How would I report this income to the IRS? How would the IRS treat my ownership/salary/dividends of the UK limited company? How would the difference in currency be addressed (I’ll be earning in GBP but will need to pay taxes in dollars)? Would it make any difference if my salary/dividends are paid into a UK bank account or a US bank account?

It’s possible that we will be able to live off my husband’s salary while we live in the USA, so we won't necessarily need to take money out of my company - we had considered letting the cash build up within the company until we return to the UK. How would I be taxed in this instance?

Another option would be to close my UK limited company and operate as a self-employed freelancer or through a new US LLC? As a freelancer I believe I would need to report my income to the IRS via 1099 forms? How do you report on income earned through companies outside the USA? Would my UK clients need to send me 1099 forms? How would this work as a LLC? Again, how would the difference in currency be addressed (I’ll be earning in GBP but will need to pay taxes in dollars)? Would my accounts from the USA count towards an accounts history when applying for a mortgage when we return to the UK?

Which would be the most straightforward and tax-efficient option? I appreciate that the most straightforward might not be the most tax-efficient and vice versa! Any advice on the above questions would be most gratefully received.
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Old Sep 2nd 2014, 3:15 pm
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Default Re: Freelancing in the USA

You can keep the UK company, and as a US resident you will be taxed on your worldwide income. I am not sure what would happen if you did not draw a salary or dividends, but if it was that easy to avoid paying US taxes more people would do just that, so I suspect that one way or another, as you'll be working in the US, Uncle Sam will want his pound of flesh. This will also include payroll taxes in the US.
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Old Sep 2nd 2014, 4:21 pm
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Default Re: Freelancing in the USA

Won't matter if you don't draw a salary but the IRS will want to know what money is coming in and what costs (deductions), you have.

They'll get you one way or another.

(If you set up a solo 401k you can stick away @ $50K in retirement funds and that will reduce your taxable income by that amount. There is no minimum.)

You might like to invest a couple hundred dollars, it's tax deductible, in QuickBooks.

Setting up an LLC is easy.
The paperwork and tax implications are a little overwhelming at first but if you have half a brain, a couple of weeks will get you up to speed.

Last edited by Hotscot; Sep 2nd 2014 at 4:23 pm.
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Old Sep 2nd 2014, 4:35 pm
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Default Re: Freelancing in the USA

Originally Posted by Jo Mulcahy View Post
Hi

As a freelancer I believe I would need to report my income to the IRS via 1099 forms? How do you report on income earned through companies outside the USA? Would my UK clients need to send me 1099 forms? How would this work as a LLC? Again, how would the difference in currency be addressed (I’ll be earning in GBP but will need to pay taxes in dollars)? Would my accounts from the USA count towards an accounts history when applying for a mortgage when we return to the UK?
The person for whom you do the work sends you the 1099, indicating what they paid you during the year; you then use this data to calculate your annual tax return. You must pay an estimated tax quarterly if self-employed, to the government and the state (if your state has an income tax). If you are being paid from overseas, you will obviously not receive a 1099, so you just report what you earn. Kind of an honor system thing, I suppose, but if one is having money wired into one's account from abroad, I've always felt it's best to be up front!
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Old Sep 2nd 2014, 5:47 pm
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Default Re: Freelancing in the USA

After the year end the IRS publishes an "average" exchange rate for each tax year. Using the rate specific to each day is an acceptable alternative, but gets to be cumbersome if you have more than a couple of dozen receipts each year.
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Old Sep 2nd 2014, 6:16 pm
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Default Re: Freelancing in the USA

Just in case you wonder whether it might be a good idea to get professional advice in order to determine how to best set things up....lots of people here have used the following accountant (he's actually a BE member - but doesn't post here any more) and they've all spoken highly of him:

(see post #2 for direct link): http://britishexpats.com/forum/usa-5...st-bay-841485/
(Note: He's actually in NY)

Maybe it's worth paying to get his professional advice....send him a note which includes your post above and see what he'd charge to advise on how best to set
up your US business.
At least he'd be familiar with all the tax ramifications in both countries and the pros and cons of various choices.

The cost of that advice could probably (?) be a tax deduction for you.
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Old Sep 2nd 2014, 6:37 pm
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Default Re: Freelancing in the USA

If the OP does decide to go the LLC route, I suggest they look at filing S-Corp status with the IRS. There is a distinction between an LLC with S-Corp status, and a true Corporation. An LLC is a pass-through tax entity: The profits and losses of the business pass through to its owners, who report them on their personal tax returns just as they would if they owned a partnership or sole proprietorship.

We created a PLLC and opted for S-Corp status to take advantage of one of the last tax loopholes that are available to S Corporation shareholders.
Tax savings come in the form of reduced employment taxes (FICA and Medicare), which can be 15.3% using the combined employer and employee parts of the tax. What you pay as salaries vs. S Corporation distributions will not effect your overall federal "income tax" liability, but it does offer an opportunity to reduce the employment taxes to the extent you reclassify wages to S Corporation distributions. The IRS are well aware of this, and it is important to pay the 'going rate' as a salary, and the rest as a S-Corp distribution. The IRS requires that an S Corporation owner first allocate any cash distributions from the company to their wages to the extent that a salary amount can be justified based on the value of the services rendered and the extent of the experience and time and effort they spend on that job. For 2014 the maximum salary on which you pay the combined employee and employer share of the FICA tax is $117,000. Therefore, as long as a person's combined wages from all employers is above this amount any increase in wages does not increase this tax. The other part of the employment tax, Medicare, is 2.9%, and it doesn't have any maximum wage cap. All wages from all employers is taxed at this rate for Medicare. Both these taxes are withheld from wages and reported on your quarterly Form 941 reports.


In summary, you pay employment taxes on wages and you do not pay them on distributions classified as S Corporation distributions. Taking S-Corp distributions means you keep more of your hard earned money in your pocket, and away from Uncle Sam. (I'm not adverse to paying my 'share' of taxes, and as a small employer we send Uncle Sam 40k a month - our share and our employees share. The tax laws are complicated, and primarily influenced by lobbyists. We are just using the tax code to the letter of the law).
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Old Sep 2nd 2014, 7:52 pm
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Default Re: Freelancing in the USA

But if it's a one man LLC, or includes spousal component...
...research "disregarded entity".
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Old Sep 2nd 2014, 8:41 pm
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Default Re: Freelancing in the USA

Originally Posted by Hotscot View Post
But if it's a one man LLC, or includes spousal component...
...research "disregarded entity".
Makes no difference. An LLC can elect S-corp status with one member, or one hundred members.

Our PLLC is a single member LLC (it has to be, my wife is the veterinarian and Texas law does not allow a non veterinarian (me) to own part of a PLLC). We elected to be treated as a S-Corporation, and are therefore not a disregarded entity.
IRS Publication 3402 has all the details on this.
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Old Sep 2nd 2014, 10:29 pm
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Default Re: Freelancing in the USA

That's my point. Certainly in CA the LLC becomes disregarded entity by default, however you have other choices on how you'd like to be treated by the IRS. Probably the same all over I suppose.

I'm only saying have a read about the various elections.
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Old Sep 3rd 2014, 10:06 am
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Default Re: Freelancing in the USA

Thank you very much for the advice.

It sounds like there are several options and that I'd do well to seek some professional advice on which business structure would be the most tax efficient route. Hopefully we will be able to get my husbands company to foot the bill for some tax advice upfront before we move to CA!
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Old Sep 3rd 2014, 11:21 pm
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Default Re: Freelancing in the USA

Please note that there are complicated tax reporting requirements for:

Foreign entities doing business in the US, and
US persons (not just citizens) owning a percentage of foreign entities, and
US entities owned by a foreign person, and
US persons (not just citizens) with foreign bank accounts.

When you talk to your professional you may want to query them on some of these requirements. Many "local" tax and legal professionals work so rarely with "international" type issues that they slip up on the complex bits.
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