If you are willing to work in Singapore on an independent basis as an individual contractor, you will be held liable to pay tax under the category of self-employment tax. However, there’s always a way that can help you legally avoid self-employment USA tax in Singapore so you won’t regret working abroad. To make sure you unnecessarily don’t overpay, reading this post may prove valuable.
What Is USA Self-Employment Tax In Singapore?
When it comes to evaluating self-employment US taxation in Singapore, it comprises social security and Medicare taxes for individuals who work for themselves. However, if you work under a contractor or employer, you pay half of the sum of both the taxes, i.e. Social Security and Medicare Taxes. And when you are self-employed, you will work both as an employer as well as an employee, and thus required to pay the full sum of both the taxes.
How to Organize Your Business to Avoid Paying Excess Self-Employment Tax as an US Expat in Singapore?
If you seek detailed information and get the assistance of a professional tax expert, you will be able to avoid paying the excessive self-employment tax. As a US expat in Singapore, you can minimize your self-employment tax burden by structuring your business income accordingly. Being a self-employed individual, you may have or haven’t established a limited liability company (LLC) to conduct your business operation. According to the law, a single owner running an LLC will not be categorized as a separate entity for tax purposes but will be considered a disregarded entity in which the net income you have earned is only subject to self-employment tax.
However, by filing form 8832 you can elect for your LLC to be categorized as a corporation. Then, by filling the form 2553 you can elect your LLC to be treated as an S corporation. With the legal ability to run your business through the S corporation, your clients will pay the S corporation instead of you personally. As an owner of an S corporation, you will be liable to receive two major types of income one is salary and another one is distributions. It is the salary that will be subject to social security and medicare tax, not the distribution.
One key thing to note here is that your S corporation will be eligible for the foreign earned income exclusion, the ‘distributions’ are not considered “earned income” and wouldn’t qualify for the exclusion.
Is There Is Any Possibility To Avoid Paying Self-Employment Tax With A LLC In Singapore?
The best way to avoid paying self-employment tax in Singapore is to establish a US LLC in Singapore. For US tax returns in Singapore, a foreign LLC is considered a foreign corporation. And if you operate your business through a US LLC, your earned income i.e. salary paid by the foreign LLC would not be subject to social security and medicare tax. And finally, the income will be eligible for the foreign earned income exclusion.
There’s no certain magic to reduce self-employment US tax in Singapore. However, with detailed knowledge and information, you may be able to reduce your tax burden. Whether you are using an S corporation or a foreign LLC, it is a must to maintain the throughout records of your business activity so that you can submit accurate financial reports. Above all, it is crucial to seek professional tax specialist guidance before proceeding.