U.S. citizens living overseas often assume that “being out of the U.S.” means their business income is no longer a U.S. tax problem. Unfortunately, U.S. citizens are generally taxed on worldwide income and still have U.S. filing obligations even while living abroad.
This FAQ explains—plainly—how the choice between a single-member LLC (default Schedule C) and an S-corporation structure affects:
- U.S. income tax vs self-employment/payroll tax
- Foreign Earned Income Exclusion (FEIE)
- Totalization agreements (eg. Spain social security vs U.S. FICA)
- Why you generally cannot “move income” between entities after the fact
- Common planning steps before year-end
Educational content only; not legal/tax advice. Cross-border facts vary fast. Always apply to your specific numbers, residency days, entity ownership, and where work is actually performed.
Core concept: You can’t just “assign” income to whichever entity is cheaper
If customers contracted with (and paid) your LLC, that’s usually the entity that earned the income. Moving income to an S-corp without real business substance (contracts, invoicing, bank flow, who performed the work, etc.) can look like “paper shifting.”
Better approach: decide the “operating entity” before you bill customers (or restructure with real agreements going forward).
FAQ 1) I’m a U.S. citizen living in Spain. Do I still file U.S. taxes?
Yes, in most cases. The IRS generally treats U.S. citizens as taxable on worldwide income, regardless of where they live.
Living abroad may give you powerful relief tools (like FEIE and Foreign Tax Credit), but it usually does not eliminate filing.
FAQ 2) What’s the default tax treatment of a single-member LLC owned by a U.S. citizen?
A single-member LLC is usually a disregarded entity for federal tax purposes (unless you elect otherwise). Practically, the business income is reported on your Form 1040, typically Schedule C, and the net profit is usually subject to:
- Income tax, and
- Self-employment tax (Social Security/Medicare equivalent), unless an exception applies.
FAQ 3) If I qualify for the Foreign Earned Income Exclusion (FEIE), does it eliminate U.S. tax on my LLC income?
FEIE can exclude certain foreign earned income if you meet the qualifying tests (most commonly the Physical Presence Test or Bona Fide Residence Test).
But two major “gotchas”:
- FEIE applies to “earned” income, not everything.
- FEIE does not automatically eliminate self-employment tax.
Self-employment tax relief often depends on a totalization agreement (see FAQ 6).
Also, the FEIE amount changes by year (examples):
- 2025 tax year: max exclusion shown on Form 2555 = $130,000
- 2026 tax year: IRS inflation guidance indicates $132,900
FAQ 4) What changes if my LLC is taxed as an S-Corp?
An S-corp changes how your income is split:
- W-2 wages you pay yourself (as an employee), plus
- Pass-through profit (reported to you on a K-1)
Why people choose S-corp (in the U.S.)
In many domestic situations, S-corp owners try to reduce self-employment-type taxes by taking part of income as wages and part as pass-through profit.
The key international twist
FEIE generally applies to your “foreign earned income” (wages), not to “distributions of corporate earnings.” IRS instructions explicitly distinguish earned income from distributions of corporate earnings.
So if your goal is “maximize FEIE,” note this practical reality:
- W-2 wages (earned income) may qualify for FEIE if you meet the tests.
- S-corp pass-through profit is generally not “wages,” and may not be excludable under FEIE in the way wages are.
FAQ 5) Do I have to pay myself a salary in an S-corp?
Usually, if you perform services for the S-corp, the IRS expects reasonable compensation as wages. IRS materials emphasize that officer/shareholder compensation can’t be avoided by calling payments “distributions.”
Practical takeaway: If you want FEIE to apply to the S-corp money you personally “earn,” you generally need wage income—not just pass-through profit.
FAQ 6) If I’m in Spain, do I still owe U.S. Social Security/Medicare (FICA) on S-corp wages or LLC self-employment income?
This is where totalization agreements matter.
The U.S.–Spain Social Security agreement (totalization) coordinates which country gets to apply social security coverage rules in many situations. The agreement text reflects the general idea that employment/self-employment coverage is tied to where the work/residence rules apply (with specific exceptions).
Real-world best practice: determine whether you should be paying into Spain or U.S. social security and obtain the right documentation (often a certificate of coverage), because this can materially change whether U.S. SE tax or payroll taxes apply.
FAQ 7) Can I keep the profit inside the S-corp/LLC and avoid U.S. tax until I withdraw it?
Usually no.
- With a single-member LLC, the profit is typically taxed to you as it’s earned.
- With an S-corp, pass-through income is generally taxed to shareholders whether or not cash is distributed.
So “leaving money in the bank account” typically does not mean “not taxable.”
FAQ 8) Can my California S-corp create California filing headaches even if I live abroad?
Potentially, yes—state rules can be sticky. If you maintain a California entity, California may still expect certain filings and may apply its “doing business” standards depending on facts.
Also, if you operate an LLC that becomes subject to California LLC rules, California has an $800 annual LLC tax/payment mechanism (when applicable) described in its official LLC guidance.
FAQ 9) Can I move income from my LLC to my S-corp by calling it a “management fee”?
Only if it’s real.
If the S-corp actually provides services to the LLC (management, marketing, operations, etc.), then an arm’s-length service arrangement can exist. But “creating fees” with no substance is a common audit problem area—especially when entities share the same owners.
If you want this structure, do it correctly:
- Written service agreement
- Real scope of work
- Real invoicing cadence
- Market-based pricing logic
- Clean bookkeeping trail
FAQ 10) What if I’m late and want my LLC to be taxed as an S-corp for the current year?
An LLC can often elect S-corp treatment, and the IRS has procedures that may allow late S-election relief in many cases. Rev. Proc. 2013-30 is the core IRS procedure people rely on for certain late election relief scenarios.
Important: timing and paperwork matter—especially near year-end—because wages, reporting, and documentation should align with reality.
Get a professional review before you “lock in” the wrong structure
If you’re living abroad and deciding between LLC vs S-corp, the right answer depends on: where you physically work, your FEIE eligibility, whether totalization applies, state compliance exposure, and how to document compensation correctly.
Book a paid consult here: https://oandgaccounting.com/appointment-booking-form/
