Caveat: This article is only for Americans who live outside the US more-or-less full time (i.e., expats and digital nomads who qualify for the foreign earned income exclusion).
No, seriously, US residents. Love you guys, but stop sending me emails after you read articles like these. The ideas discussed here simply won’t work for you.
OK, now that it’s just us, let’s talk.
The Times, They Are A-Changin’
If you’re like most normal humans, the potential tax consequences were the furthest thing from your mind when you published your first blog post or released your first podcast. You just wanted to get your ideas out there.
However, now that you’ve developed a following and you’re beginning to monetize, it’s time for that to change.
You no longer just have a hobby. You’re starting a business, and a business needs a legal structure.
Did you just say “Legal Structure”? Where’s that back button . . .
Here’s the bottom line: simply setting up the proper legal structure for your business can save you a ton of money in US tax easily and absolutely legally.
So much money that it’s worth spending two whole minutes to read this article and learn how it all works.
And you just have to set it up once-the savings roll in year after year.
Aren’t there much easier ways to not pay tax (wink wink)?
It’s not the ’80s anymore. You can’t just head outside the US, make a ton of money, and hope the IRS doesn’t figure it out.
Google Adsense and all major ad and affiliate networks require you to provide a valid tax identification number, and they check it and report your income to the IRS.
They’re serious about this stuff.
So, you can’t simply hide under a rug and hope this whole tax thing blows over. And going that route entails a whole bunch of stress every time you visit the US or your mom says she got an interesting letter for you in the mail.
The much easier way to deal with taxes is to simply set things up correctly from the beginning. Then, you don’t have to worry about anything, you can simply file 100% truthful US tax returns.
The awesome thing about these returns is they may have a total US tax bill of $0.00 if you set things up as discussed in this article.
OK Fine, Let’s talk legal structuring
Let’s look at two alternative futures for your blog or podcast: operating exactly as you are now and operating through a non-US corporation.
Potential Future #1: Operating as a Sole Proprietor
“Sole proprietor” just means a human running a business in their own name. If you bought a domain using your own credit card, and then you sat down and fired up WordPress and Adsense (etc.), then you’re a sole proprietor for US tax purposes.
Now, the good news is, as an expat or digital nomad, you can take advantage of the foreign earned income exclusion (the “FEIE”). The FEIE allows you to make about $100,000 per year without paying any US income tax.
However, here’s the bad news:
- As a sole proprietor, you’re considered to be “self-employed” for US tax purposes.
- The FEIE works only for income tax purposes-it doesn’t do a thing for the “self-employment tax,” which is about 15% up to $118,000 and about 3% over that amount.
- Then, in years when your gross income is over about $100,000, the “scaleback rule” will reduce the effectiveness of the FEIE. So, even if your net income is below the FEIE cap of about $100,000, the scaleback rule may still cause you to pay US tax if your gross income is above that amount.
The bottom line is that a sole proprietor pays a lot of US tax.
Potential Future #2: Operating through a Non-US Corporation
Instead of being a sole proprietor, the better way to do it is to operate your blog or podcast through a non-US corporation.
Here’s how this structure works:
- You form a non-US corporation. You can be the sole shareholder and sole director, so you own 100% of it and control everything.
- You then form an LLC in which your non-US corporation is the sole member. This allows you to open a US bank account under your non-US corporation. This way, all of the assets of your company stay in the company, and there’s a clear line between business assets and personal assets.
- Finally, you cause your business to be operated by the LLC that’s underneath your non-US corporation.
This might sound really confusing at the moment. But here in a bit, I’ll show you exactly how you can set up this structure yourself. Yes, this really is something you can do without spending a ton of money!
Here’s how this structure is treated for US tax purposes:
- Under this structure, you have two roles for US tax purposes-you’re the sole shareholder of the corporation, and then you’re also an employee of the corporation.
- Since you’re an employee, you’re not self-employed for US tax purposes (like a sole proprietor is). So, this structure legally gets rid of the self-employment tax. That’s an easy 15% savings, right from the get-go.
- Finally, this structure automatically gets rid of the scaleback rule, allowing you to make a nice, clean about $100k completely tax-free each year.
Show me the real-world savings
Here are some examples to show the actual benefits of using the non-US corporation structure for your blog or podcast. We’ll assume you qualify for the foreign earned income exclusion for the whole year (so you don’t pay any US income tax on amounts under about $100,000):
- Let’s say you have a year where your blog or podcast makes $10,000 of net income. You’d have to pay about $1,500 in self-employment tax if you keep operating as a sole proprietor.
- With net income of $50,000, the amount you pay as a sole proprietor goes up to about $7,500.
- Then, in a year when you have net income of $100,000, your US tax bill as a sole proprietor would be about $25,000!
What could you do with $25,000? Operating as a sole proprietor, you’d simply have to hand all that money over to the US government.
Now, here’s the kicker: Under each of the scenarios above, with a non-US corporation structure in place, your US tax bill would be exactly $0.00, all perfectly legally and above-board.
By the way, when I say this is absolutely legal, that actually means something because I’m a US tax attorney. I’m not just some “offshore guru” selling hype without the actual credentials to back it up.
But isn’t it really expensive to form a non-US corporation?
Yeah, it costs at least $10,000, but it’s totally worth it . . .
Just kidding! That’s how things used to be (and still are if you talk to an “offshore guru”).
You can actually do it yourself without spending very much at all. I’ll show you exactly how to do it.
If you can sign up for a PayPal account, you can form a non-US corporation structure. That’s really all it takes-you just have to click around a bit, type information into boxes, and send emails.
You can handle this!
so How do I form a non-US corporation structure?
Well, it takes a little explaining to show you exactly how to set up the proper legal structure for your blog or podcast. And the structure itself is just a little bit more involved than simply a non-US corporation.
Been waiting for the sales pitch? Here it comes:
That’s why I created the Tax-Savvy Expat courses:
- Tax-Savvy Expat : Essentials discusses the basics of US tax for expats and digital nomads. It covers the foreign earned income exclusion, foreign housing deduction/exclusion, and the foreign tax credit.
- Tax-Savvy Expat : Freelancer is for folks who have a profession-people who sell their own time and attention to multiple clients.
- Tax-Savvy Expat : Entrepreneur is for business owners-folks who sell something other than their own time and attention.
Selling ads, selling guest posts/appearances, affiliate marketing, and all the other ways to monetize a blog or podcast definitely qualify as a business, so you’re in Entrepreneur territory.
Essentials makes sure you fully understand how the basic tax rules work. Then, Entrepreneur dives into the details of how tax works under the non-US corporation structure.
Here’s the best part: Entrepreneur includes four other ingredients to get you all set up for success:
- a step-by-step guide to actually forming your own non-US corporation structure, with clear easy-to-follow instructions,
- links to the actual resources you need to get your own non-US corporation structure up and running,
- the actual legal documents you need to properly put your structure together, and
- the legal structure itself–your purchase of Entrepreneur includes the first-year fees for the legal structure you need to get the tax savings discussed above.
Finally, your purchase of Entrepreneur includes a consultation call. So, after you take the course, we’ll get on the phone to make sure you understand exactly what you need to do and how the tax rules apply to your specific situation.
I’ll wait until I’m making $x a month to set this up
It doesn’t cost nearly as much as you think to set this up, so there’s no need to wait until you hit some arbitrary revenue goal.
Everything you need to get going is included in the Entrepreneur package. So, your non-US corporation structure will pay for itself in the very first year if you make $1,000 a month from your blog or podcast.
Plus, getting this structure in place now gets you properly positioned for the pop. You’ll have everything already set up when the traffic hits.
It would be terrible to have a really good month and have to send a bunch of money to the IRS just because you didn’t take a little time to get your legal structure together.
Finally, there’s also a tax reason to set things up sooner rather than later. Contributing an on-going business to a non-US corporation can be a taxable event. So, it’s better to do that while things are slow and the business isn’t worth much.
Thanks for taking the time to read this article. I hope you now realize how
- a non-US corporation can save you a ton of money over the years and
- Tax-Savvy Expat : Entrepreneur is the most cost-effective way to get the proper legal structure in place for your business.
CLICK HERE to read more about Tax-Savvy Expat : Entrepreneur.
Also, here’s a great resource for ideas on how to make money with a travel blog.
Ready to become an expert on this stuff? Click here to take the US Tax Masterclass for Americans Abroad (absolutely free).