Ahh, the perks of being a digital nomad. Location freedom. Time freedom. Uncapped income potential. Paying taxes to the US even though you don’t live there.
Wait… What? IRS freedom doesn’t come as part of the nomad lifestyle?
No.
But as a nomad, you already know that nothing is impossible. So you’re questioning the narrative, trying to find a way to not have to pay your taxes in the US.
Whether it was your research or a fellow nomad, something led you to arrive here. With the belief that if you register a company abroad you won’t have to pay taxes in the US.
Sounds too good to be true?
Keep reading to find out if it is.
By the end of this short article, you’ll understand how it could work, what are the benefits and downfalls. You’ll also read about why registering a business in the US might still be the better option.
Why Would I Register a Company Abroad?
The biggest benefit is not having to pay social security (or self-employment) taxes in the US.
How Does This Affect My Tax Liability?
Like anything else written in legalese or Greek, tax laws can be confusing. But the concept is easy to understand when broken down like this…
Entity Formation
When you incorporate a business, the business is treated as an entity. Separate from you… Sounds like the beginning of a sci-fi novel, doesn’t it?
To make things more interesting, even though you’ve created this entity, it can now employ you.
You can be the sole shareholder, the director, the only employee, the only person involved in this business. But it’ll always be seen as separate from you.
So, imagine you want to incorporate a business somewhere in the World, that isn’t the USA.
The process of company registration will vary from country to country. And let’s be honest, as a foreigner, you’ll have to jump through a lot of hoops.
You’ll have to hire a professional to help you with all the paperwork.
Once you have your company formed, you‘ll set yourself up as an employee of the company. And you’ll withdraw money from the business as a salary.
In the eyes of the IRS, you’re now employed by a foreign corporation.
And this is the key to not having to pay social security and self-employment taxes in the US.
Foreign Employers and Social Security Tax
Foreign corporations are not required to withhold part of their employees’ wages for social security tax or Medicare. As explained by the IRS.
In other words, your corporation (your employer, you) doesn’t have to pay these taxes as long as it’s registered abroad.
Employees and Social Security Tax
Your corporation, the entity, is your employer. And you’re just an employee. As an employee, you’re not responsible for paying your social security tax.
So, your corporation doesn’t pay these taxes because it’s registered offshore, and you don’t pay them because you’re an employee.
Self-Employment Tax
If you’re working for yourself (don’t have a registered business that employs you) you’re liable to pay self-employment tax.
So, when you register a business offshore and register yourself as an employee, you’re not self-employed anymore. And you’re no longer liable to pay self-employment tax.
Foreign Earned Income Exclusion
The final step to getting away completely tax-free is the Foreign Earned Income Exclusion.
This scheme offers exclusion from paying income tax on foreign earned income. And since your corporation is registered abroad, it is foreign.
For most people, the exclusion threshold of just over $100k per year is enough. There are some requirements you must meet to qualify for this exclusion.
The requirements relate to how much time you spend outside of the US. They’re a little complicated. You can read more about them here.
The Downside of Offshore Business Formation
At first glance, it seems like the perfect solution. More money in my pocket? Sign me up!
Before you run off searching for the perfect offshore tax haven to register your business, let’s look at the downsides.
You’ll Be Liable For Tax Somewhere Else
Sure, you won’t pay taxes in the US. But your corporation will be liable to pay them in the country where it’s registered.
You can find a country that offers better tax rates than the US, but now you’ll be subject to their bureaucracy and penalties.
This poses a risk greater than the savings you’ll make on income tax. The savings will likely only be a few % Because most countries have similar tax rates.
Having to deal with foreign tax laws, maybe in a different language, means you’re more prone to making a mistake. And that means you have to account for possible penalties.
Goodbye Retirement
You’re a nomad in your prime, you’re travelling the world and living your best life. Retirement is probably not on your mind.
Paying less tax might seem like the perfect way to save money right now. But is it worth it?
What Could Your Retirement Be in the Future?
- Passive income that you don’t need because you became a millionaire. Nobody says no to passive income though. Even if you’re already a millionaire, you’ll just take the money and invest it.
- Passive income that you do need. Imagine that even though you lived an awesome nomad life, in the end, you didn’t accumulate a lot of wealth. Or, something happened that set you back. Maybe you needed medical care. Either way, now at a ripe age, you have passive income that’s helping you out, a LOT.
If you don’t pay taxes in the US you will not be entitled to anything in the end.
Since the US is one of the more stable economies of the world, it might be a good investment after all.
Of course, don’t bet all your future on your retirement money, but treat it as an investment.
Complicated Paperwork
Owning shares in a business abroad, being an employee to a foreign company, filing for your exemptions. It might seem simple at first, but it’s a rabbit hole of regulations and forms. Both foreign and domestic.
You won’t have to handle just the IRS, now you have two tax regulators on your back. The IRS, and the foreign one, wherever your company is registered.
The IRS doesn’t leave room for mistakes. The fines are enormous and the IRS officers are unforgiving. And it’s fair to guess that this is common across all countries.
You’ll have to hire somebody to do all this paperwork for you. So in the end whatever you save, you’ll end up spending.
Summary; Should You Register a Business in the US?
Registering a business abroad might save you a little bit of money on your tax. But in the end, you’ll have to file tax paperwork to the US and the foreign country your business is registered in. This is time-consuming and puts you at a bigger risk of making a mistake and being penalized. You’ll also lose out on future retirement.
Registering your business in the US is the simplest option.
Instead of complicating your life to save a little bit of money, register your business in the US. You’ll be able to pay your taxes in one place and keep things under control.
Company Registration in the US Is Easy and Remote
You don’t have to come back to the US to register your business. The process can be done 100% remotely, online. You fill out a form, pay a small fee, and all the paperwork is done for you.
This way you can
Find out more about remote company formation here.
