# Online income from the states



## ShotgunJones (Jul 18, 2012)

Hi all. Just wondering if anyone can help with this one. I'm wanting to start selling a skin care line online. I live in Scotland but the company is based in the states and would be sold to mostly people in the states. Now I figure I'll need to do American income taxes but would I be taxed on it here as well? The earnings go onto a visa debit card if that makes any difference. Any help would be great, thanks!


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## Moulard (Feb 3, 2017)

The business structure you set up is important. For example it will help determine if you are an employee of a company (that you may happen to be an owner, director or shareholder of too), self employed. Your US tax returns will look quite different in each circumstance.

For what its worth how you are paid makes no difference, but where the business is registered, the type of business and your relationship with it will.


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## Bevdeforges (Nov 16, 2007)

Not sure what you mean by "the company is based in the states" but that would seem to be the crux of the problem, as Moulard has indicated. There is no reason not to set the company up where you are. It really doesn't matter where your customers are located, other than for making payment "convenient" by having a US bank account for them to pay into.
Cheers,
Bev


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## ShotgunJones (Jul 18, 2012)

I say it's based in the US because it's a company like Avon or Mary Kay. I would still get a W2 from them. So I don't know if I'd need to pay taxes on my income here or not. More or less everything about it will be American based but I'll get money here. Does that make sense?


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## Bevdeforges (Nov 16, 2007)

OK, that makes a bit of sense. However, that makes you an employee of the company, and you need to be very careful about things like US Social Security and double taxation and how the UK sees, recognizes and taxes "self-employment" like that. If they are taking US SS out of your pay, you won't be able to get it back - and if you're resident in the UK, you are supposed to be paying UK social insurances on your income. Technically speaking, you are working in the UK if you are physically present there while doing the work. 

You may want to consider becoming really "self-employed" and being paid for your work directly (i.e. invoicing for your services without having US withholdings taken out). The fact of you working outside the US means that you should be able to exclude all "earned income" from US taxation or offset US taxes paid with UK taxes on your earnings. You don't have the choice to do it the other way around, though.
Cheers,
Bev


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## gairloch (Jun 24, 2011)

BLUF: If you live on the UK, you must pay tax on your world-die income to the UK.
IF you are making money in the US, regardless of where you live, you will be taxed in the US as that income 'arises' in the US).
The good news is a double taxation agreement so you want be taxed twice (mostly anyway).
Bad news is you have to file tax in both countries, and possibly both personal and business/self-employment. You'll need to cover both retirement systems (Social Security was previously mentioned).

So I hope you make money from it because their will be a lot of paperwork.

BTW, find out the taxes you'll need to pay beforehand because self-employment taxes can be high.


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## Bevdeforges (Nov 16, 2007)

I beg to differ a bit with Gairloch's scenario.



> IF you are making money in the US, regardless of where you live, you will be taxed in the US as that income 'arises' in the US).


Not really. The OP states that he'll be getting a W-2 from a US company because the company is based in the US. However, because the OP is actually resident abroad and working outside the US (i.e. doing whatever it is to earn the salary outside the US), that income will be eligible either for the FEIE or for Foreign Tax Credit for taxes paid to the UK. The issue is that of getting back any withholding tax the employer takes. If the employer is taking state withholding that may not be refundable.



> Bad news is you have to file tax in both countries, and possibly both personal and business/self-employment. You'll need to cover both retirement systems (Social Security was previously mentioned).


Yes to having to file taxes in both countries, but you don't contribute to US Social Security if you are properly enrolled in the "social security" system where you live and work. (The UK and US have a social security treaty on this.)

The big "gotcha" in all this is that most employers who want to work deals for people to telecommute from overseas have no idea what the actual requirements are and just add to the confusion by insisting the employee give them a US address. Be very, very careful.
Cheers,
Bev


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## Moulard (Feb 3, 2017)

My personal view is that the lot of these companies are not much more than multi-level marketing schemes... which is just the polite way of saying pyramid scheme. 

While I do not know Avon, Mary Kay and I am not commenting at all on their particular business practices, nor do I know which organisation you are looking at, I do know a lot of these type of direct selling organisations require you to be an independent contractor or set up your own business. 

In part this is so that they can avoid things like payroll taxes, pension and insurance payments and pretty much outsource all of the risk of running a business to you. Fundamentally they sell you their product at a profit, then leave you to your own devices. The price you pay ends up tied to the amount of product that you sell (and in some cases the number of distributors you recruit and what they sell), and thus it can be a rather fraught business model for you. 

That said, it clearly works for some people... Just suggesting you do your homework first - particularly given the added complication of dual tax returns.

But setting that aside if the organisation you will (for want of a better term) sub-contract to has a UK presence then I imagine that you will be dealing with their local distributors rather than direct with the US, so I won't see any need to set up a US business presence. I know several Australian small business owners who buy goods from the US and sell them locally.

I hazard to guess you have two primary options ...

Option 1 .. is to operate in what I would call a sole trader model (I assume the UK has this sort of business arrangement in the US I think it is called Sole Proprietor). This is effectively the self employment model. It typically has the advantage of lower administrative costs, income is treated as your own personal income, you are personally liable for business debts, etc. Under this model, you would have to report self employment income on your US tax returns. There are gotchas in the way the SE taxes are calculated that you should carefully consider. Phil Hodgen has a lot of interesting things to say on the topic ... 

https://hodgen.com/foreign-earned-income-exclusion-self-employed-americans/

Option 2 is to set up some for of business entity. This has the advantage of protecting your personal assets. Assume you would be the (or an) owner of the business. You have the options of taking a wage or simple dividends from the business. Your business would pay UK taxes on its income, you on your income from the business. You would be able to treat your income as earned income and either exclude or not as you choose. You would have to file Form 5471 as an owner of that business.


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## gairloch (Jun 24, 2011)

Bevdeforges said:


> I beg to differ a bit with Gairloch's scenario.
> Not really. The OP states that he'll be getting a W-2 from a US company because the company is based in the US. However, because the OP is actually resident abroad and working outside the US (i.e. doing whatever it is to earn the salary outside the US), that income will be eligible either for the FEIE or for Foreign Tax Credit for taxes paid to the UK. The issue is that of getting back any withholding tax the employer takes. If the employer is taking state withholding that may not be refundable.
> Bev


I think you are right. He is being paid a salary as a employee abroad. FEIE applies of course.
If it were not a salary, but income based on products sold in the US (i.e. not a salary, would it be a different? [Of course DTA and UK tax still apply]


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## Bevdeforges (Nov 16, 2007)

gairloch said:


> I think you are right. He is being paid a salary as a employee abroad. FEIE applies of course.
> If it were not a salary, but income based on products sold in the US (i.e. not a salary, would it be a different? [Of course DTA and UK tax still apply]


It would really depend. (Don't you just LOVE that answer!?) 

Technically speaking, if the OP were being paid on a "commission only" basis, it could very well be treated (at least by the "employer") as the equivalent of a salary. Or, if "self-employed" and deriving his/her income by selling stuff online in the US, it would still be eligible for FEIE (i.e. as a sole proprietorship). 

As far as I know, the "self-employment tax" issue comes down to whether or not the OP is covered by and paying into the UK social security system, which would, I suspect be related to the nature of the employment arrangements.

The problem with this sort of deal is that the "employer" normally just wants to do whatever they normally do about their payroll, with no consideration about what the "employee's" foreign residence means for tax purposes.
Cheers,
Bev


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