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I think you're discussing a different problem from the parent post. Depending on how you form your US company, you can end up in a situation where the company p

by eli 6y ago

I think you're discussing a different problem from the parent post. Depending on how you form your US company, you can end up in a situation where the company pays corporate income taxes on any profits, and then when you distribute those profits to yourself you pay personal income tax on them too -- so the same income is essentially taxed twice. There are separate issues with how the US taxes money made overseas.

withinboredom 6y ago
Hmm. Yeah, I see your point. The point I was making though is that pass-through causes /all/ income to be taxed as personal income. When outside the US, you also have to pay income tax in your country (most likely). So now you’re paying income taxes for all revenue (not profits) in both countries. Even with the tax treaty, you’re still looking at an extra ~15% tax on whatever you pay in your own country. With a C Corp, you pay US taxes via the company. You control how much goes to you, personally, which you pay income taxes on. Depending on the amount, you may not have any issues with US income tax.
- gamblor956 6y ago
  A tax treaty would not apply to that situation. It protects foreign taxpayers from double taxation, not expats. Expats most get relief from their home country for home source income.
mbreese 6y ago
> the same income is essentially taxed twice What about if you pay yourself as a W2 employee? Then, isn’t your salary treated as an expense of the corporation and thus only taxed at the personal level?
- URSpider94 6y ago
  That's correct, if you pay yourself, that's an expense for the company and deducted from taxable income. And you'll pay personal income tax on it.
- Digory 6y ago
  Top Federal rate for W2 income: 37% + 2.9% Medicare + 12.6% on the FICA portion. Top Federal rate for dividend/profit distribution: 20% All other things being equal, as the company earns more than your base wage, you want it to be treated as dividend income.
  - deleted 6y ago
    [deleted]
URSpider94 6y ago
With a corporation, you have three choices on how to be taxed. One, you can pay yourself a salary up to any amount, even potentially making a loss for the corporation (as long as someone will give you the money to stay solvent). That salary is an expense for the company, so you won't pay corporate tax on that amount. You'll then have to pay personal income tax, as well as payroll tax and probably some unemployment insurance and other fees on that. Two, you can distribute money to yourself as dividends. Dividends are cash-neutral to the corporation, so they won't deduct from the company's tax liability. Usually they come out of profits, so indeed they are post-tax money. Whomever receives the dividends will pay personal income tax on them, but at a lower rate than most people's tax on wage income (often much lower). Third, the corporation can hold all of the profits internally, which will increase the value of the company, and thus the shares held by the owners. The shareowners can eventually sell those shares for a profit, which will be taxed as long-term cap gains if held more than a year. In brief, yes, there is double taxation, in the sense that income is taxed more than once, but it's not taxed at the full rate used for wages both times, and it's possible to defer that second tax bill indefinitely.

by eli 6y ago

withinboredom 6y ago

Hmm. Yeah, I see your point. The point I was making though is that pass-through causes /all/ income to be taxed as personal income. When outside the US, you also have to pay income tax in your country (most likely). So now you’re paying income taxes for all revenue (not profits) in both countries. Even with the tax treaty, you’re still looking at an extra ~15% tax on whatever you pay in your own country. With a C Corp, you pay US taxes via the company. You control how much goes to you, personally, which you pay income taxes on. Depending on the amount, you may not have any issues with US income tax.

gamblor956 6y ago
A tax treaty would not apply to that situation. It protects foreign taxpayers from double taxation, not expats. Expats most get relief from their home country for home source income.

mbreese 6y ago

> the same income is essentially taxed twice What about if you pay yourself as a W2 employee? Then, isn’t your salary treated as an expense of the corporation and thus only taxed at the personal level?

URSpider94 6y ago
That's correct, if you pay yourself, that's an expense for the company and deducted from taxable income. And you'll pay personal income tax on it.
Digory 6y ago
Top Federal rate for W2 income: 37% + 2.9% Medicare + 12.6% on the FICA portion. Top Federal rate for dividend/profit distribution: 20% All other things being equal, as the company earns more than your base wage, you want it to be treated as dividend income.
- deleted 6y ago
  [deleted]

URSpider94 6y ago

With a corporation, you have three choices on how to be taxed. One, you can pay yourself a salary up to any amount, even potentially making a loss for the corporation (as long as someone will give you the money to stay solvent). That salary is an expense for the company, so you won't pay corporate tax on that amount. You'll then have to pay personal income tax, as well as payroll tax and probably some unemployment insurance and other fees on that. Two, you can distribute money to yourself as dividends. Dividends are cash-neutral to the corporation, so they won't deduct from the company's tax liability. Usually they come out of profits, so indeed they are post-tax money. Whomever receives the dividends will pay personal income tax on them, but at a lower rate than most people's tax on wage income (often much lower). Third, the corporation can hold all of the profits internally, which will increase the value of the company, and thus the shares held by the owners. The shareowners can eventually sell those shares for a profit, which will be taxed as long-term cap gains if held more than a year. In brief, yes, there is double taxation, in the sense that income is taxed more than once, but it's not taxed at the full rate used for wages both times, and it's possible to defer that second tax bill indefinitely.