I think what you may be missing is that (and I'm not an accountant so I'm not sure, but I used to have an accountant so I know what they're likely to say): 1. your income will also be taxed by the country you live in; 2. I think you won't be able to deduct your house/living expenses as an ordinary expense of business. Gee, wouldn't it be nice if we could. Someone tried to convince the IRS that living expenses were necessary expenses in order to stay employed in order to generate income, but that didn't fly. If you form a C corp, cap gains receive favored treatment, I think. An LLC receives no tax treatment, as P/L is passed onto the partners. In that respect, it's like an S Corp. Whatever entity... allowable deductions are ordinary business expenses: phone, office, postage, professional fees, parts of medical insurance, data feed, software and so on. The costs of doing business. From the corp's profits, you'd pay yourself a salary. On that salary you will pay FICA. It's not all bad: assuming the gov't doesn't permit the social security system to go under, which is in their interest, you could get more out of ss than you ever put in. You'll also be eligible for medicare, which will save you a bunch on health insurance. All you have to do is pay into ss, and then not die. That salary is, as you know, your earned income. With that, you can contribute to a 401 or SEP IRA or IRA retirement plan. Now about your example. Unless your fiancee is trading shoulder to shoulder with you and generating profits, don't give her half your income. I know you love her and trust her with your life, but it's not the wisest thing to do. She's not reading this, is she? First, things happen, and she may never become your wife, in which case, she's still entitled to half your trading profits. Or you guys may get divorced, in which case, she's entitled to half the profits, plus half your salary, plus the house. I know people think it happens to the other guy, but sometimes you become the other guy. That's where the "other guys" come from. They come from the land of "That will Never Happen To Me". A better way is to employ her as a part timer and pay her. It's deductible to the LLC, and earned income to her. Whatever you pay yourselves has to be in line with the industry. She can do the books, handle paperwork, whatever. If she's a trader, then that's a different story if she's bringing in money. Pay then should be proportional, to be fair. To use your example for a couple of scenarios: assume you have $200K in cap gains profits, in a LLC. The LLC has business expenses of, let's say, $20,000 year, and you pay your fiance $50K a year, pays you $80,000 a year, puts $X in your retirement plan and $X in hers (a 401 where you can contribute sizable amounts and have your employer, the LLC, match contributions. The LLC can then deduct the cost of its contributions from its profit), and passes the $50,000 (less retirement matching contributions) balance to you (If it were a C corp, it could retain the 50K (less contributions) and pay the corp. tax rate on it). You would personally have earned income of $80,000 and passive income of $50,000 (less the previously mentioned contributions). Your fiance would have earned income of $50,000. Your FICA would be based on the $80,000 salary, which gets reported on schedule C, from which you can further write off other nominal expenses such as auto use. That earned income also becomes the base for which the retirement contributions could be made. Play with those figures to see how it would work with the $80,000 exemption you mentioned.
FICA is a lot more than 7%. It's going to be more like 12% or 15% depending on if you are an employee or not.
gms, thanks for your input....some corrections though.... you don't deduct housing expenses as the business expense. there is a little thing called the foreign housing exclusion, and the foreign housing deduction which enables you to deduct any rent/utilities above 11k for the year (see http://www.irs.gov/pub/irs-pdf/p54.pdf and related articles). the only catch is that it must have been employer-provided. this is easy. you are right, income is taxed in the country you live in...oh by the way, the bahamas doesn't have personal income tax now what you are saying is that the FICA is applied BEFORE the exemption...i don't think this is the case. here is the form: http://www.irs.gov/pub/irs-pdf/f2555.pdf (look at line 43, and then 1040 line 22 and 23)
http://www.medlawplus.com/library/legal/definitions/fica.htm looks like you are incorrect. basically, once the LLC pays out all of its profits to the 'employees', it doesn't owe any taxes. But the remaining FICA taxes for the employees ARE around 7% (http://www.planningtips.com/quikgui...3ficarates.html). again, this is imposed AFTER the foreign exemption, so its relatively small.
Looks that you're very close to being dead on funky. Yet, FICA, even after any possible foreign exemption will be15.3% (less the write off for it)........will flow thru....on YOUR SALARAY. -Someone has to pay the full FICA amount. When its your employer, they pay half & you pay half. It depends how the payments from the LLC are structured. Here's a helpful link (mid-page) http://www.tdip.com/Whatyou.pdf Search ET for metoox or Bahamas....he's already answered all these offshore questions, I've chatted with him on the phone -very nice guy & seems to have the tax situation down correctly. I chose Hawaii part time & paid the taxes, but kept my residency in TX (and live there 6+ mos/yr. in TX). No state income taxes in TX--very nice. No SS tax, no LLC filing headache, no LLC fees, favorable write offs as sole proprietor, lower cost of living here, more things to do, as much as taxes hurt-they aren't everything, I assure you. Trade your ass off, make a ton, pay taxes, then buy muni-bonds & retire.....and don't pay them again. Cheers! %
Funky, it says, "member of a single-member LLC from the business are treated as "earning income" and, therefore, subject to self-employment tax." The self employment tax is not going to be 7+% which is 1/2 of the 15+% combined payment by employee and employer. Instead it is going to be the "self employment tax" which is about 12%. Not positive on the rate but it should be pretty close to that.
ah ha! there is the catch. now what happens if my relatives are the members....hmmmm, time to call mom and pop
You'll still pay roughly 12% on it, even after inviting mom & pop in. You don't have to pay FICA on all your profits -if structured correctly & distributed correctly. Fica only on your salary at 12%ish. By the way......why the burning desire to have "earned income"? I haven't had any of that for about 5 years now! :eek:
If you stay in US for less than 183 days per year, the first $80,000 of earned income are not taxable.