I'm moving to Ireland in a month, where I will be in a much higher tax bracket than I will be when I leave Ireland in about 5-10 years (40% income tax in Ireland vs. 24% when I return to the US). I will be working for an employer as well as doing some contract work that I'm considering making corp-to-corp to reduce my overall tax burden.
Here's the idea:
1. Do my contracting work corp-to-corp, but don't pay myself any salary or dividends while in Ireland. I'm anticipating this protecting me from exceeding the foreign earned income exclusion as well as not having the contracting income be taxed at 40% Irish income tax +15.3% US self employment tax (i.e. for the c-corp, I'll just have to pay the corporate income tax while abroad).
2. Let the money accumulate in the c-corp until I return to the US (moving back from a 40% bracket to a 24% bracket).
3. Pay myself (60% salary, 40% dividends) a little more than the company is earning, so I gradually drain the income I accumulated while in Ireland. Keep doing this for several years until I've drained it, then just pay myself the same amount as the c-corp makes each year.
4. Set up a 401k with maximum matching, so I can reduce personal income tax and corporate income tax.
Does this approach make sense, or would it be better to just set up an LLC, pass the income through, and take the 40% hit (at least I can deduct business expenses and 401k)?
are you a US citizen and if so plan to retain citizenship?
US citizens are taxed on their worldwide income. however, if they take a job in a foreign country they may be able to exclude this income by filing form 2555 with their return.
see this link to read who qualifies
don't know Ireland's tax laws. but no one works for nothing which is essence what you are trying to do with setting up a corp and not paying yourself a salary. also when you come back to the US and at that time draw out any remaining profits, they will be taxed.
Thanks for the response! Here are a few clarifications:
* I am a US citizen and plan to retain citizenship.
* I plan to claim the foreign earned income exclusion via the tax home test and physical presence test.
* Under foreign earned income exclusion, it looks like salaries are excluded up to 105.9k, but dividends are not excluded. I would still prefer to avoid the 40% Irish personal income tax if possible though, even if US personal income tax gets excluded.
The question about working for nothing is tough to answer... I'm thinking since the c-corp is a separate legal entity, if it doesn't pay me, Ireland wouldn't consider me (as a person) to have received any income for them to look at (not counting the income from the employer), right? So then it would just come down to if the US (or Wyoming, since the c-corp would be registered there) would allow the c-corp to not pay me. I'm having a hard time finding a good answer to that one.
Someone needs to run the numbers here to see what scenario works best, but just real quickly I have a couple of comments:
- Am I missing something, or do you think the C corp won't have to pay any tax on the revenue? Both federal and state.
- And since this is a C corp, you will have double tax as to get the $$ out you will need to pay out a wage or dividend, either one which will be taxed.
- Finally, you are basing a long term decision based on current tax law, which as we all know can quickly change
- This is complicated enough that you need to spend the $$ to consult with a tax professional that understand both U.S. and Irish tax law. In my mind, this is not an area to be penny wise and pound foolish.
Thanks for answering! Clarifications below:
* The C corp would pay tax on its revenue in the form of federal corporate income tax in the US (15% bracket), and no state corporate income tax (Wyoming).
* The goal would be to only pay the tax on revenue while in Ireland (since I wouldn't pay myself a salary/dividends while abroad), and then pay myself salary/dividends after I return (which would trigger the second part of the double taxation you mentioned).
* That's a good point!
* Another good point, and sage advice. I'll definitely go that route if I decide to move forward with this approach, given how complicated the arrangement could become.
Absolutely agree with @Rick19744 that you need professional help before you make such a decision. To me what you are creating ( and under US laws ) a shell company, that earns income abroad, has no employee, pays no taxes abroad ( at least intentwise ) and delays or no US taxation. It needs professional help to stay within the law and still profit ---- the big guys do it all the time ( till stopped ) and with very special legal and accounting help. Perhaps it is simpler to just follow normal people tax laws and pay the "debt" to the taxman. Sorry I could not be more enthusiastic.
a common mistake made by many owners of S-Corps and C-Corps who do work for them(perform services which brings in the money) but pay themselves no salary. Then one day thy are paid a visit by the IRS or ask to come into the IRS offices. There they are told paying no salaries when they performed services is a big no-no. Then the IRS imputes salaries. Hits the taxpayer with trust fund penalties for failure to withhold and pay the fica and social security taxes on such imputed salaries plus other penalties and interest. then hits them again on there personal income tax return. if they can't pay, the IRS could and has placed liens on the taxpayers property.
all this is to say you need to consult a tax pro who specializes in international taxation so your "tax savings plan" doesn't end up costing you a fortune.