# US Expat Resident in the UK - Freelance Contractor with Ltd Company



## jamie-design

Hi all,

So last October, I ventured into the world of Freelancing as a Designer in the UK, and per my accountants recommendations, have setup a Limited Company, where I am the director and sole employee.

I get paid a basic salary, and the rest in dividends, and my gross income is looking to be around £60,000 GBP for the year.

I have filed US taxes before, but after doing some research on advice as to how I should file taxes now that I get income as dividends, I'm left very confused, a little nervous, and worried that having a limited company may be more trouble than it's worth when it comes to taxes.

My primary question is anyone in a similar position and what forms would they recommend I look into? There's been talk of filing a 5471, but as I don't technically own stock in the company, and based on the projected turnover, I wasn't sure this was relevant. Also, mainly is there any way to get my dividends that are paid by the company to be included under the foreign income exclusion?

Any help would be amazing, as am currently quite lost.

Thanks,


Jamie


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## Bevdeforges

Take a look at Pub 54 and the matter of self-employment. If you are a registered company, you should probably be characterizing your income from the company as "salary" rather than as dividends. (As far as I know you do not have to be consistent between how you file in the UK vs. how you file in the US.) As long as you can justify your "salary" as being reasonable compensation for the work you do in your business, it should be eligible for the FEIE.

The other question is that of being enrolled in the UK "social security" system - because as long as you are paying in as you are supposed to, you should be able to avoid having to pay "self-employment" tax (i.e. both employee and employer portions of US Social Security). 
Cheers,
Bev


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## Moulard

If I understand correctly, a limited company in the UK is a separate legal entity and your company is paying PAYE and NI for you. Therefore you are not self employed. 

With sole proprietorships, where the business is unincorporated, you have the option to either treat yourself as self-employed or treat the company as a corporation and then file accordingly.

I don't believe that your business structure gives you that choice.

As such I believe that you are meant to file Form 5471. I don't think it matters if there is any formal stock if you are the registered owner of a business that is a distinct legal entity.

To make matters worse you may also have to file Form 926 if you have transferred any property to your company.

The wages your business pays you as an employee would be reported as salary. The dividends payed to you as an owner of the company would be reported separately. You would be able to exclude your foreign earned income and dividends would be treated as passive income.


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## Bevdeforges

If only it were as direct as that. Depending on what form the "limited company" takes, it may or may not meet the requirements of being "certain" foreign corporations, which is what form 5471 is all about. On at least one listing of business forms that the IRS considers to be corporations, "public limited company" is included, with no mention of "private limited company." So, you make your own interpretation and you file your returns accordingly.

There is also the caveat in Publication 54 about being able to consider payments that reflect "payments for services rendered" to the company as salary, no matter how they are characterized for local tax purposes. 

In any event, it's safest to stake out a clear position and file your US returns accordingly. If and when the IRS comes back to ask questions, you explain your position so that you are clearly acting in good faith. But depending on the amounts involved, that may or may not ever happen.
Cheers,
Bev


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## celticweb

I went through some options regarding this last year with a formation of a new limited company in the UK. I remember there was an option for a corporation with a single owner to be treated as a 'disregarded entity' for tax purposes. I believe I had to obtain an EIN for my Limited Company with an SS-4. and needed to file 8832 to have my limited company be ignored as a separate entity. 

In the end I renounced citizenship so never had to follow up on any of this but maybe some more knowledgeable forum members will know about this and be able to follow up on my post. With this option there was no need to file the 5471 but I think there was a different yearly form that was much easier to file.

Things might be different now but this was an option given to me last year. but the company was not formed yet. don't know if you can do this once the company has existed for a while because it's basically an election that has to be made.


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## Moulard

Thanks for that Celtic... 

I knew that a sole trader operating an unincorporated business could elect to treat their business as an incorporated entity. 

A little bit of digging... Form 8832 is basically the form to elect to do the opposite.. its clearly designed to allow a US corporation to treat the income of a wholly owned foreign subsidiary to pass-through to the head-office. I expect that it is part and parcel of the reverse takeover (Mergers and Acquisitions 101)... 

Form 8832 basically tells the IRS how the entity is going to be treated for tax purposes at its establishment (in theory this year's returns are the first return so I expect it is still a timely filing) and in this instance you would indicate that it is has a single owner. I imagine that from then on you would report on Schedule C, E and F as appropriate -- I imagine mostly C in this instance.

In essence Jamie would be electing to treat it as self employment income.

https://www.irs.gov/businesses/smal...yed/single-member-limited-liability-companies


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## jamie-design

Hi Bev, Celtic & Moulard,

Thanks so much for all your quick replies, I really appreciate all your help 

As you mentioned in your first post Moulard, a limited company in the UK is indeed a "separate legal entity", with the company paying PAYE and NI where required for me. I am technically employed by my limited company. All work I do gets billed by my company, which is also registered for VAT, and then my company would pay the appropriate corporation tax, and pay me with what's left, either through PAYE, or mainly by dividends. (I would also get taxed by the UK on the dividends I'm paid, about 7%).

Being able to file the 8832 sounds great though, and hopefully will make this process a lot easier and not require the US tax headaches the 5471 would involve and being caught out with the dividend tax?

So if I were to apply for an EIN, and complete the 8832, would that in essence mean that the company would no longer be a separate entity, but we would be regarded as one and the same thing? Would I then have to report the companies total profits and expenses under my section C as though I was self-employed?

In regards to the company paying me dividends, would this now be irrelevant as we were one and the same entity?

Lastly, as the company is registered for VAT (Value Added Tax), most of which get's paid back to the government, would this have any effect on being able to apply for a 8832, and would I have to declare it do you think?

Thanks again, hope you've all had a lovely weekend,


Jamie


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## Bevdeforges

VAT has no impact on your income as far as the US taxes are concerned - other than the net amount you pay being one of your business expenses for your company if you go the Schedule C route.
Cheers,
Bev


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## Moulard

> So if I were to apply for an EIN, and complete the 8832, would that in essence mean that the company would no longer be a separate entity, but we would be regarded as one and the same thing? Would I then have to report the companies total profits and expenses under my section C as though I was self-employed?


*IF* I have understood things correctly, and I am no means an expert, then or the purposes of US taxes you would treat it the company as an unincorporated one and as such as personal self employment income.




> In regards to the company paying me dividends, would this now be irrelevant as we were one and the same entity?


Correct. As all profits and losses etc are now personal profits and losses, dividends become irrelevant as for the purposes of US taxes you and your company are the same legal entity.



> Lastly, as the company is registered for VAT (Value Added Tax), most of which get's paid back to the government, would this have any effect on being able to apply for a 8832, and would I have to declare it do you think?


I doubt it will effect your ability to apply for an 8832 treatment.
How it is treated from a US tax perspective would require some investigation.
On first blush I expect you might have to treat it as income (inbound) and a deduction (outbound). It may be possible to ignore it (passthrough) but you need to do your homework on it.


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## celticweb

I would go and read the instructions on the form 8832. Your company may automatically default to a "disregarded entity," depending on the liability of its owner. so maybe no need to file the paperwork.
In my case, we were going to be more than one, so a partnership.


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## dancintoothbrush

Hi Jamie -- would love to hear what you ended up going with as I'm in the exact same position! And to anyone, would love your thoughts as well... And because I like to torture myself and leave things until the last minute, I am now spending this weekend trying to tackle the tax return myself (deadline is Monday). I have a few questions I'm hoping someone can help me with:

Currently, if I list my dividends on form 1099-DIV under Total Ordinary Dividends (line 1a), I have to pay taxes, but if I list it under Foreign source ordinary dividends (line 27), it doesn't show that I have to pay taxes -- which one's correct?

Given that my company made less than $100,000, should I file form 5471 or 8832 (or 8858?)?

Apologies about the last minute request, but hopefully someone can help clarify!
Cheers,
Nadia


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