I have been living and working abroad for over 8 years in both New Zealand and Vietnam. In this time I have gone back to visit my family in the Florida, but it was usually for Christmas and I never stayed longer than 3 weeks as everyone, including me had to get back to work and life.
During my time abroad I had asked other US expats what they did for taxes and if we had to file if we were working abroad. I got 2 answers from most people:
1) No we don’t need to file as we are working abroad.
2) I have no idea.
This was quite confusing to say the least so last year I contacted an accountant in the USA and started doing my own research on the whole tax question for American Expats. What I found made my heart sink and is a good lesson for other American expat freelance photographers who are abroad almost year round.
Here is a list of things I learned:
1) Yes you need to file taxes every year regardless if you worked or not or if you are working for a foreign employer. No ifs ands or buts.
2) If you are freelance and are not legally working for any company(work permit or legal employment) then you are considered a sole-proprietorship business. This totally sucks by the way for 100% freelance photographers.
3) If you have setup a legal business in another country, for example Vietnam, and that country is not part of the Double Tax Treaty you basically have to pay taxes in both countries. There are a good amount here but more than likely only 20% of the countries in the world(I didn’t count).
4) If you visit the USA more than 30 days in a single year then you are no longer exempt(or significantly reduce your deduction) for income tax for IRS Foreign Earned Income Exemption as you need to qualify for either the Bona Fide Residence Test or Physical Presence Test which most of the time requires that you have not been in the USA for more than 30 days. Please keep in mind income tax is different from Social Security & Medicare which is not included in the Foreign Earned Income Exemption.
4) As a sole-proprietorship business (freelance photographer) even if you don’t have to pay income tax you still will probably have to pay for Social Security & Medicare unless the country you are living and working in has a shared Social Security & Medicare treaty or also called Totalization Agreements. There are not that many countries who are part of this agreement so you will probably need to pay this.
5) Social Security & Medicare is 15% of your Net income. So even if you don’t have to pay income tax you still will need to pay 15% for SS and Medicare unless you have no income because you bought more equipment than your income. If you did this then you got bigger problems.
6) Keep receipts for everything you spend on your photography business. I MEAN EVERYTHING. Since last year I started keeping receipts like a I have a compulsive hoarding condition. I recommend you do the same and also write on the top of your receipts what it refers too. Only thing you can’t write off is food or at least I haven’t figured it out yet.
7) If you have over $10,000 USD or equivalent money in a foreign bank you need to declare this to the US Treasury. Keywords here are “in a bank.”
Thank god I got a minor in business in University so I understood a little bit about tax law and could read through the mind numbing IRS material and understand it for the most part. After I had self educated myself I basically went to a bar and got drunk thinking about how much I would need to pay the IRS.
A little history about myself so that you can follow the rest of my story. When I went to New Zealand after University I was not a photographer and I was not freelance or working for myself. I was traveling around in a campervan and worked as a bartender or on a farm to make a little more money to keep traveling. Since I was working legally in New Zealand and working for legal businesses in NZ this saved me big time.
Back in #2 I stated that if you were truly a freelance photographer(self employed) then your basically a business in itself in the eyes of the IRS. Well it turns out that if you are working legally for a business in another country(legally employed) with no ties to the USA you don’t owe anything. Not Income tax(as long as you qualify for the FEI tests) and not Social Security and Medicare. Thank the gods there was at least some kind of break. You can read more about this in IRS Publication 54 or can be simply read here on the IRS website: Persons Employed by a Foreign Employer.
So this is one way to save you from the IRS tax man and also confirms why most American expats working for a foreign employer abroad don’t have to pay any kind of tax in the USA.
I would also like to state that my first accountant didn’t know a thing about expat tax and was quite frustrating to work with. Even though I sited IRS documents and tax law reference numbers backing up my case, he still felt that I should be paying Social Security & Medicare as he considered me as self employed even though I was legally working for a foreign employer.
I basically had to fire him and I learned another lesson, not all accountants or lawyers understand or can understand the complexities of Expat Tax Law. They are just not used to it as it is kind of special considering there are not a lot of expat Americans working for themselves. Not that I’m an expert in this either but I check my facts and contacted other accountants who are more specialized in this field and they confirmed I was correct. The accounting company I now deal with for all my tax filing is Tax Planner CPA. They have possibly the worst designed website which is utterly cheesy, but it has tons of information on it and once you start talking to them they have excellent service and communication. They also charge a fair price for supplying a Tax Lawyer for consultation as well as their really good CPAs and guarantee that you won’t have any problems. The old accountant from before was charging me twice what Tax Planner CPA charges and for inexperienced advise.
For me as a freelance American photographer in Vietnam this USA tax law is quite frustrating. I have other photographer friends living and working abroad from France, Belgium, Australia, New Zealand ect. and none of them need to pay taxes(income tax or social security programs) as long as they don’t live in their respective country for 3-6 months. 3-6 months!!!!! I have no idea why America is only 30 days but my goodness it seems short.
To me it seems America has some of the worst expat tax laws for their citizens. This is not just for us freelancers but it applies for anyone who wants to start a business abroad whether that be a bar, travel agency or any business where they are the sole owner of the business. It is almost like USA Gov doesn’t want Americans to be go out in the world and become world citizens or business owners in other economies. I doubt China does this.
In my opinion it would be more fair to give expat Americans 3 months to visit the USA to qualify for the Foreign Earned Income as well as being able to opt-out for Social Security & Medicare if you do qualify as living outside of the USA for 9 Months out of the year. Of course if you opt-out then you would not receive this benefit later. Keep in mind though as an expat you may not be able to utilize the benefit abroad anyways so you are basically paying into a system you can never use.
Now a final note to keep things clear. I love the USA and I’m proud to be an American. I am not advocating that I don’t want to pay taxes, of course who does, but I am stating that the taxes should be fair and with current USA tax laws I don’t think they are. I do pay income tax in Vietnam and I have a Vietnamese tax ID number. Every year I get a statement from the good old VN Gov showing how much in taxes I paid and it is a decent figure. The problem then is I also need to pay taxes in the USA which at the minimum is 15%(SS + Med). Depending on how good my year has been I can pay anywhere between 25-35% in tax in total for both countries. Ouch!!!
I wish all of us American Expat photographers got together with ASMP and the NPPA and hired some lobbyists to help modify these laws to make them more reasonable. Maybe if this blog post goes viral this will happen but I’m not going to hold my breath.
If anything I hope that American Expats photographers can use my lessons learned to help them figure out what they need to do for their taxes.
I will be posting some more photography business lessons in the future so keep tuned if you care to hear me ramble more.