For years, this little known tax was reserved for workers who were sent overseas with American companies, or those smattering of ex-pats who were teaching English abroad. However, with the advent of the digital office, more and more entrepreneurs are getting savvy when it comes to keeping more of their hard earned cash. Not every entrepreneur is cut out to live (and run a business) from abroad, but it might be worth looking into for a select few.
First, ask a CPA about your qualifications including the laws for countries you’re considering. The U.S. has agreements with many other countries that streamline the tax process. These include the UK, Costa Rica, South Korea and India to name just a few. If you do qualify, you’ll be paying a percentage of federal taxes that you’d normally pay as a U.S. resident, zero state taxes, and will still have to pay social security and Medicare taxes. As a ballpark figure, you might pay around 50 percent in taxes with foreign exemption than you would as a resident.
What are some common characteristics that these types of entrepreneurs exhibit?
1. They operate a business that’s easily virtual
There are many types of businesses which are a natural fit for virtual offices, such as writers, graphic designers, or even manufacturing companies or e-tailers. However, don’t force your company to be virtual just to score this tax. If that happens, your business might suffer or even fail because you’re not taking into account the best fit.
2. They truly want to live abroad
Don’t move abroad just for the foreign tax exemption. Maybe you genuinely want to live in a specific country, have visited and done your research. Maybe you’re not sure, but are willing to give it a shot and don’t have ties in the U.S. (such as a spouse and/or children) so you want to make the most of this era of freedom. Either way, don’t let taxes fully dictate your residency.
3. They can adapt easily
Culture shock is guaranteed no matter what, but you’re going to need to really adapt easily if you want to run a successful business from abroad. This includes patience, working odd hours, and potentially dealing with a culture where things are much slower and covered in red tape than in the US. If possible, spend a few weeks vacationing in the country you’re considering before you fully commit.
4. They’re tech savvy
You’re going to depend heavily on technology to run a business from abroad, and may not have the same conveniences that you do in the US. What are you going to do if you move to a country, don’t speak the language, and need to hire an IT freelancer or firm to set up your systems? Consider everything you need to run a business in the U.S., and then multiply the difficulty level by 10 for a preview.
5. They’re borderline into a higher tax bracket
If you’re hovering at the edge of a higher tax bracket and foresee your business continuing to grow, calculate just how much you’ll lose when you break over that barrier. A move might be worth it.
This is an extreme move for anyone, but might just be the secret sauce some entrepreneurs need. Are you up for the challenge?