united-states, taxes, outsourcing, tax-structure, europeI’m a software developer and I want to start doing some freelance work for clients in the US as well as clients in the EU (France). I would be developing myself and potentially hiring others to work for me or with me.
I’m a US citizen. What would be the best way to report my income overseas so that I pay the least amount of taxes? Any tax loop holes? Do I need to pay taxes if it’s under a certain quota?
What if I’m a EU citizen? Does that make a difference when reporting taxes?
A general overview of how taxes work for US citizens working abroad for freelance/opening up an outsourcing startup would be great!
I have been a freelancer across the EU since 1994 so I hope I can offer some experience/advice.
Firstly, Uncle Sam is one of three countries that tax citizens regardless where they reside in the world. If you live outside the US, you are required by law to fill a special form in, telling Uncle Sam what you earned in where-ever it is that you live (France for example). If your income is above a certain amount ($170,000 I think) then Uncle Sam wants a cut in addition to whatever tax you might have paid France.
If you earn below a a certain amount, the US still expects you to complete the form but tax will not likely become due.
If you curious, the tax the US takes from citizens who live abroad goes towards war veterans who were injured doing their thing abroad.
Think of Nina Simone and Charlie Chapman - both of them got into trouble for living permanently outside the US and Uncle Sam did not forgive them for not contributing to the war funds.
I recommend you watch a documentary called The Corporation (it came out about ten year ago and the first 30-60mins of it will help your thinking, though the entire program is worth watching either way).
I assume you are talking about incorporating a company. If not, you should be. The cost of incorporating varies from <$100 to >$1000 depending on US State and EU Country.
When you incorporate a company, you are creating an entity. This means there are two different taxes that you must consider. One is the Company taxes, and the other are your personal taxes. It is critical that you be clear on this. Because both are liable for different types of taxes. In addition, if the company screws up, then the company, not you personally is held liable. If a court of law rules that you did not take careful steps to avoid the error, then they can prosecute you personally. A kayaking firms management team in the UK got hit with manslaughter a few year ago because they inadequately supervised a bunch of tourists on the water, two people drowned and the law figured that management made a daft decision. This is important. However… If you create a company, have a good business plan, raise cash from someone and the business goes bust and the company cannot repay the debt then a court of law will review, see it was bad luck and not bad intent, and kiss the debt good bye leaving you able to open another business.
The UK and Ireland require a minimum of two “officers” in a Limited company (minimum Company Secretary and a Managing Director - One person cannot fill both positions). One of them must be resident in the country. Registering is straight forward and cost friendly ($100-$500).
Germany has a “UG” status that requires one “officer” to create. Registering in Germany costs about 1000euro.
If you believe your turnover will be more than 70k then you need register for VAT (sales tax). It’s free to register.
Then you will need an accountant to submit your tax work. Each situation can vary, for me, it costs me about €1500 a year - I have a good accountant and meet them once or twice a year.
Will your employees be direct employees (meaning you pay their taxes for them) or they will be contractors (they invoice you and they are responsible for their own taxes/pension/health).
Tax loop holes are unfashionable and illegal. There are two terms to be familiar with. Tax efficiency (legal)and Tax avoidance (illegal). The tax man has seen it, sniffed it, touched it, tasted it, moulded, proded and slept with every idea imaginable. I don’t recommend you avoid taxes.
Efficiency on the other hand is acceptable.
Corporation tax is in the news alot these days. After your company has paid it’s employees, paid its sale taxes, paid all its bills, and then makes a profit… the taxman then takes another slice. It’s called Corporation Tax and it varies from one country to the next. Some countries have a flat rate corporation tax (the UK has 19%, Ireland has 12%, the US and Germany have a sliding scale, the more your company profits, the higher the Corporation tax).
So, depending on where the company is incorporated can depend on how much the profit is taxed. In order to avoid corporation tax you can award your employees bonus’s, or you can invest the money by opening another office in another country or a number of other steps. It’s a huge area. Accountants and tax advisors get paid a fortune because they keep an eye on taxs law changed that bring efficiency. There are ‘general’ laws and then there are cross border agreements (thus the UK might one law when trading with one country, and then a general law for trading with the rest of the world).
Then you have Deleware. When the US talks about closing down tax loopholes in Cayman or Bermuda, they tend to run silent on Delaware which has a boat load of incorporated companies that assist a boat load of companies be efficient in their tax.
In all EU you pay taxes to the state where the company (you) is founded.
If you register a company in France - USA won’t even know. It is a French company. USA state will not claim taxes for that company or any of it’s business. You only need to pay taxes to the French state.
Citizenship does not matter. I’m pretty sure EU taxes are lower in any form than US taxes, so I suggest stay with French state.
Opening a company in EU is usually complicated. The western you go - the more complex it gets. This is why it is common practice to advise with a local lawyer. They typically won’t charge you for initial case study if you have them represent you when registering the company.
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