Let’s say I have APRC. Thus, I have two choices in Taiwan:
Work for a company. Earn 50,000 USD/year.
a. Taiwan tax: 12% income tax.
b. USA tax: After FEIE, 0% tax.
Self-employed. Earn 50,000 USD/year.
a. Taiwan tax: 20% income tax.
b. USA tax: FEIE and FTC does not apply, need to pay self-employment
tax, which is 15.3% for income over 400 USD.
Is this correct? It seems implausible that if I choose self-employment, that all of a sudden, I would need to pay a huge sum of tax to the US. Am I really supposed to pay double tax? US/TW do not have a double tax treaty. Can someone explain how FEIE and FTC works in the case of self-employment?
By self employment what do you mean? US LLC? Taiwan sole proprietor? Offshore pass through entity?
There’s ways to tax optimize a US LLC for US citizens.
For example if it’s a US LLC you could get a S-Corp tax designation, set your salary to something reasonable based on Taiwan market conditions (say 30k USD) and you only pay FICA, SS, medicare on that 30k. Taiwan taxes the remaining salary, and then you take FEIE or FTC on tax paid to Taiwan (depending on whichever results in more tax savings - most likely FEIE since US tax is higher at lower brackets). The remaining dividends are not taxed by Taiwan since it falls under AMT exclusion, unless you are issuing >200k USD in dividends. Or go a step further and contribute your W2 salary from the S-corp to a 401k to tax shelter it from both Taiwan and the US.
Thank you for the quick reply. My situation is very simple. After working in Taiwan and getting an APRC I can decide whether to continue to work for my current Taiwanese employer, or become a freelancer. The freelancer option (self-employed) is more attractive because I’ll have other clients in addition to my old company and will give out my own fapiao and pay tax myself to Taiwan.
The US has two separate taxes, (1) income tax (which FEIE and FTC can reduce), and (2) self-employment tax. If I’m a freelancer (self-employed), it looks like I have to pay full tax to the US in addition to Taiwan because I can’t use FEIE or FTC to reduce the self-employment tax, is that correct?
You’re right, I would have to create my own Taiwanese company to issue fapiaos. Still, in the eyes of the IRS, this makes me the sole proprietor of the company, which means they will consider me as self-employed as far as I understand.
You wouldn’t pay any US self employment tax in that case, because you’re an employee of your Taiwan company
Sole proprietorship means unincorporated
If I set up a Taiwanese company where I’m the only employee, so that I only pay income tax instead of self-employed tax to the US, what is the name of this structure and how is it classified with the IRS? You mentioned “sole proprietor”, which is unincorporated, but the IRS says that sole proprietors must pay self-employment tax, in addition to income tax:
Taiwan limited company can be either a sole proprietor, or a corp in eyes of IRS. There is a “check the box” election form you file after you form a company here to tell IRS which you are.
I do know someone that has a limited company here that is treated as a “foreign disregarded entity”, but they pay themselves a tw salary enough to zero their net income and avoid self employment tax in US.
Either way, US tax filings will forever be a huge pain with ownership of a foreign company
And consider how much you want to do this if you plan on wanting social security in the future. I’ve known a couple semi permanent oconus military contractors that bitch about how little SS they get despite the multiple years of 0 they paid in.
This is an important question and many (most) people in Taiwan get it wrong. If they do get audited by the IRS, they’re in for a big and potentially expensive headache.
Your basic assumptions are correct. Since unlike with Europe, Canada, Japan, South Korea, and a few other countries, there is no US-Taiwan tax treaty, US citizens who are self employed in Taiwan are typically double-taxed. FEIE and FTC will not offset that 15.3% self-employment tax.
Very importantly, there is a lot of incorrect advice in this thread. Also things that are omitted / implied but need to be thought about. These include:
“Salary from your own Taiwan company does not pay US self employment tax” and “You’re not a sole proprietor if you incorporate a company in Taiwan.” This is not necessarily true. If you’re the sole proprietor, unless you elect for an S-Corp status (only for US entities), the IRS may come after you for US self employment tax. Sorry jimbob132 but your advice is incorrect and as much as I hate the US tax system following citizens around the world forever until they renounce citizenship (I truly do), I also don’t want people to get into audits and other penalties that cost them potentially tens of thousands of dollars and years of stress. You should be careful about giving advice on this topic, you’re providing the wrong info.
You’re not considering the big tax compliance headache for a US citizen owning a significant stake in a non-US entity. Even if it’s technically just a simple business like a one-person freelancing business in Taiwan, that opens up a whole new foreign business section on your US taxes. It’s really something that a CPA familiar with international/expat taxes should prepare for you, simply b/c the penalties for making a mistake are very high and the forms are complex.
S-Corp: Besides the fact that it needs to be a US LLC (which your Taiwanese client/“employer” may not want/be set up to pay), note that it costs time and usually money to set up and maintain an S-Corp. You need to set it up, and then set up payroll to pay yourself with the necessary withholding, plus it makes your US taxes a bit more complicated. I’ve seen ranges around USD $500 to $5k to set it up one time, and another $1-3k per year to maintain it. If you’re making $USD 150k+ per year and your Taiwanese clients are OK to pay a US entity, then OK it may be worth it. But if are making let’s say USD $40 to 150k per year, it’s not certain that the tax savings are more than the accounting and related compliance costs. And the S-Corp shields some, but not all of your self employment income from tax. You are supposed to still pay yourself a “reasonable” salary (so if you’re for example a software engineer, you might not be able to get away in an audit with saying your salary is $30k, even in Taiwan). Also note you can’t easily bounce back and forth between S-Corp and not each year. So if your income changes, it may offer an advantage one year and a net loss the next.
If you have a Taiwan company employing people including yourself, the default structure for this is a corporation unless you elect differently. I’m not talking about what happens if you elect it as a pass through entity for whatever reason.
You are saying an employee and owner of a Taiwan corporation that is filing 5471 as a foreign corporation, who did not elect pass through tax status, taking a salary from the foreign corporation, has to pay self employment tax? Where in the tax code does it say this?
In my first reply I mentioned S corp election is only for a US LLC. You obviously can’t elect S status for a Taiwan company.
I can’t cover all the edge cases in what I said, I can only cover the general case. Not if you do special elections to have your foreign corporations treated differently. If you want more into I’d consult an actual CPA or international tax law specialist. Also probably read through all 52 pages of that 5471 filing to get a better understanding of all the special considerations: https://www.irs.gov/pub/irs-pdf/i5471.pdf
There’s too many edge cases to cover here. You can get out of having to file 5471 by having less than a specific amount of ownership.
OK, but that’s kind of the point. The OP is not talking about edge cases or owning very small amounts of equity. They are specifically asking about changing from an employee to a freelancer / sole proprietor or similar. The IRS considers those disregarded entities, so it’s not going to give some tax loophole on self employment income. Or to have a complex structure (like with multiple parties owning it), then they are getting into first of all super high tax compliance / filing costs (for sure more than any savings unless they are earning millions of $USD from it). So to make those complex self employment corporate/tax structures work for a US expat in Taiwan is actually the edge case. The base case is that none of those work. The base case options are:
a) Open a US LLC (and potentially file as an S-Corp), if the Taiwanese “client” agrees to pay a US entity without a Taiwanese entity, or just do it as self employment income without an LLC (easier but less liability protection, difficult to separate personal from business accounting, etc.–but doable).
b) Open a Taiwanese (or other non-US) entity and jump through all the tax compliance requirements for US persons (still likely will need to pay US self employment tax).
c) Continue working as an employee to the Taiwanese company.
Note: if OP does want to take other freelance clients, maybe worth mixing a) and c): Work for the Taiwanese company (and exclude salary with FEIE and FTC), but also do freelancing on the side (and most of that 15.3% will be double-taxed by IRS and Taiwan).
Also note that the amount taxed by the US is the net income (profit). So you should use all of the deductions available to make that as low as possible (home office deduction, business development expenses, maybe part or all of utilities used for the business like mobile plan, home internet, if you need to lease a car for work, etc.). Though of course the more aggressive you are with that, you could also open yourself to an audit. But unlikely if the amounts in question aren’t too high.
Assuming OP wants to issue fapiao, they would need to incorporate a company in Taiwan. I’m not sure if there is any way around this.
There’s a few options:
Open a US entity, then a Taiwan branch or subsidiary
Open a standalone Taiwan company, file 5471 as foreign corporation every year
Open a standalone Taiwan company, then elect as a sole proprietor
I would recommend #2 and #1 in that order. Why? Well because the Taiwan corporate tax rate is 20% and the US corporate tax rate is 21%. This makes 5471 purely an informational tax return because the Taiwan corporate tax rate is at or above 90% of the US corporate tax rate. So your GILTI and Subpart F filings are much simplified, and you do not owe the US any corporate taxes unless you are doing some edge cases like using the company for passive rather than active income. You will not owe the US corporate tax on your Taiwan company in the majority of cases assuming you are running an active business, and your salary from your Taiwan company is not subject to self employment taxes.
I wouldn’t recommend #3 - because you still need to file and pay Taiwan corporate tax to the Taiwan government, and now you also need to pay self employment tax to the US. It’s getting double taxed.
I also did not suggest rep office for #1 - from what I understand they cannot issue fapiao
All of this information has surprised me. I always assumed if my profit was less than $70,000 a year I didn’t need to even bother filing taxes in the US.
Not to mention FATCA penalties or PFIC penalties if you buy into investment funds. Then there are excise tax penalties if you have a cash growth life or health policy, really there is a long list.