This is general education, not legal or tax advice. International facts change the answer quickly (treaties, entity ownership, where services are performed, where inventory sits, and local-country rules).
1) I’m a U.S. citizen living abroad. Should I run my business as an S-Corp or an LLC?
It depends on what you’re trying to optimize. The common tradeoff is:
- S-Corp: lets you split cash you take out into (a) W-2 wages and (b) Passthrough Income (profit). That can reduce employment taxes in many domestic cases, but it creates payroll compliance and “reasonable compensation” risk.
- Single-member LLC (Schedule C): simpler, but business profit is generally subject to self-employment tax (unless an exception applies).
For U.S. citizens abroad, the key wrinkle is how the Foreign Earned Income Exclusion (FEIE) interacts with wages vs. business profit, and whether Social Security/Medicare applies under U.S. rules and/or a totalization agreement.
2) How does the Foreign Earned Income Exclusion (FEIE) interact with S-Corp wages vs Passthrough Profit?
In plain terms:
- W-2 wages can qualify as foreign earned income if you meet the FEIE tests and the services are performed abroad.
- S-Corp profit generally are not “wages” and don’t automatically fit the FEIE bucket.
So if you’re abroad and trying to use FEIE, the wage component is typically the part that’s most directly aligned to the FEIE concept.
Big caution: FEIE doesn’t automatically eliminate Social Security/Medicare or self-employment tax
Even when your income tax is reduced by FEIE, Social Security/Medicare (FICA) or self-employment tax may still apply depending on facts (including whether you work for a U.S. employer, and whether a totalization agreement applies).
3) Is there a “best ratio” of wages vs Passthrough Profit for S-Corp owners abroad?
There’s no one-size ratio because the IRS standard is reasonable compensation—a facts-and-circumstances test based on your role, industry norms, business profitability, and comparable pay.
A practical approach that tends to hold up:
- Document what a third party would be paid for the same work (job listings, compensation surveys, contracts, time allocation).
- Keep the wage number consistent with business reality (not “whatever maximizes exclusions”).
- Reassess annually as profitability and duties change.
If wages are set unrealistically low, the IRS can reclassify distributions as wages (creating payroll tax, penalties, and interest exposure).
4) If I have W-2 wages for part of the year and self-employment income for the rest, can I still use foreign housing benefits on Form 2555?
Yes, but the mechanics matter:
- Employees generally claim a housing exclusion.
- Self-employed individuals generally claim a housing deduction.
In mixed-income years (some wages + some self-employment), you typically compute housing benefits based on qualifying days and limits, and the form handles the math—what matters is you don’t “double dip.”
Keep:
- proof of foreign tax home + physical presence/bona fide residence facts,
- lease and utility documentation (if relevant),
- and a clean day-count record.
5) If I pay foreign contractors from my U.S. S-Corp or LLC, where do I deduct it—and do I need 1099s?
Where do I deduct it?
You can generally deduct contractor costs in the appropriate expense category (contract labor, professional fees, etc.). Whether you label it “foreign contractor” is usually an internal bookkeeping preference—not an IRS requirement.
Do I issue a 1099?
Often, no—if the contractor is a non-U.S. person performing services entirely outside the U.S., it generally won’t be a typical 1099-NEC scenario. The best practice is to keep:
- W-8BEN/W-8BEN-E (as applicable),
- invoices/contracts,
- and documentation showing where the services were performed.
If you also pay U.S. contractors, many businesses keep separate GL lines (domestic vs foreign) purely to make compliance and reviews easier.
6) Do expats need to make quarterly estimated payments if their income tax will be “zero”?
Possibly, yes.
Even when income tax is reduced (for example, due to FEIE), you may still owe:
- self-employment tax, or
- Social Security/Medicare obligations (depending on employment status and totalization rules).
Publication 54 highlights that self-employment tax rules can still apply to U.S. citizens/residents abroad, and totalization agreements can change the outcome.
7) Our partnership withheld U.S. tax (Form 8804/8805) but later realized we had no ECI. How do we get the money back?
In many cases, the refund is claimed at the partner/member level, because the withholding is credited to the partners.
Common workflow (high-level):
- Correct the partnership reporting if needed (amended partnership return/K-1s where applicable).
- Partners file U.S. returns to claim the withholding credit and request a refund (often attaching the withholding statements).
Also: If you stop withholding in a future year because there is truly no effectively connected income, you may still receive IRS “nudge” letters asking about withholding—those can often be resolved by responding with a clear explanation and support.
8) Does the QBI deduction apply if the work is performed entirely outside the U.S.?
Often no. QBI is tied to a qualified trade or business, and IRS guidance for the QBI forms frames QBI as including qualified items that are effectively connected with the conduct of a trade or business within the United States.
This is a common surprise for U.S. citizens abroad who assume QBI is automatic on pass-through profits.
9) We receive royalties as foreigners and 30% is withheld. Can a U.S. C-Corp reduce the withholding?
Sometimes a U.S. corporation as the payee can change how the payer applies withholding—but it’s not “free money.”
A U.S. C-Corp generally means:
- corporate income tax at the entity level, and
- potentially dividend withholding when profits are paid out to foreign owners.
Also, if a corporation’s income is mostly passive (interest/royalties/dividends) and ownership is concentrated, additional regimes (like personal holding company concepts) may become relevant depending on facts.
This is an area where the best structure is very payer- and country-specific.
10) What is a PFIC and should foreigners sell foreign mutual funds before moving to the U.S.?
PFICs (Passive Foreign Investment Companies) are one of the most punitive U.S. international tax regimes. If a person becomes a U.S. tax resident while holding PFICs (often foreign mutual funds/ETFs), the compliance can be painful and the tax outcomes can be harsh without elections.
In practice:
- Some people try to clean up PFIC exposure before U.S. residency begins.
- Others keep the investments but plan elections/reporting to reduce surprises.
- If PFICs are discovered years later, cleanup may require amended filings and careful strategy.
11) How are foreign pensions and retirement accounts taxed after someone becomes a U.S. tax resident?
In general, the U.S. taxes U.S. citizens and residents on worldwide income. Whether a foreign retirement arrangement gets U.S.-style deferral depends heavily on:
- treaty coverage (if any),
- whether the plan is treated like a pension, trust, or something else under U.S. rules,
- and how contributions/earnings/distributions work.
A simplified principle:
- If you don’t take distributions, you often don’t have taxable pension “income” yet—but reporting obligations (FBAR/FATCA/trust forms) may still exist depending on the structure.
- When distributions occur, the taxable portion depends on basis/earnings and how U.S. rules characterize the plan.
12) What is Form 6166 and why do foreign payers keep getting asked for it?
Form 6166 is a Certificate of U.S. Residency used to claim treaty benefits or reduced withholding in another country. You request it by filing Form 8802 with the IRS.
Foreign payers commonly ask for it when they want proof that the payee is a U.S. resident for treaty purposes, so they can reduce or eliminate withholding in the source country.
13) Why can’t my LLC get a Form 6166 (but my U.S friend’s LLC did)?
Because a lot of LLCs are tax-transparent for U.S. purposes:
- A single-member LLC is usually a disregarded entity (the IRS looks through to the owner).
- A multi-member LLC is usually treated as a partnership unless it elects otherwise.
For treaty residency certification, the IRS often focuses on who is the actual taxpayer (the owner(s)), not the transparent LLC itself. That’s why you may see IRS requests for owner authorizations and proof of the owners’ U.S. filing/residency status.
14) Our LLC has two foreign members and no U.S. returns yet (first year). The IRS asked for authorizations form 8821 and still rejected the 6166 request. What’s going on?
Two common issues:
- The IRS is looking for U.S. tax residency at the taxpayer level.
- Authorization and verification logistics.
If the relevant taxpayer files as a nonresident (or doesn’t file at all yet), the IRS may not issue residency certification.
The IRS may request authorization forms 8821 (often for each owner) so it can verify filings/identity and review eligibility. If a fax isn’t processed or the IRS can’t match it cleanly, the request can stall.
15) Can a foreign owned LLC elect to be taxed as a corporation to qualify for Form 6166?
Often, yes—electing corporate tax treatment can make the entity itself the taxpayer (rather than “look-through” owners). When the entity is treated as a corporation, it is generally treated as a U.S. resident entity for many treaty certification purposes, so it may be eligible to request Form 6166 via Form 8802.
But the tradeoff is real:
- A corporation pays U.S. corporate tax on profits.
- Paying profits out to foreign owners can trigger dividend withholding and other cross-border considerations.
So this is usually a “withholding reduction vs U.S. corporate tax cost” decision.
16) If we elect corporate treatment and keep all profits in the U.S. company, do we still pay U.S. tax?
Yes. Keeping cash inside the corporation does not eliminate corporate income tax. The corporation is taxed on net profit.
What reduces net profit?
- Ordinary and necessary business expenses,
- Arm’s-length service fees,
- Legitimate reimbursements,
- Cost of goods sold, etc.
What doesn’t work (and is high-risk):
- moving money to a related party account – whether domestic or abroad with no real purpose,
- circular transfers that don’t reflect real services,
- or “expenses” that are essentially disguised distributions.
If related-party payments are involved, you must think about substance, documentation, and arm’s-length pricing.
Need help deciding the cleanest structure (and getting Form 6166 done correctly)?
Book a paid consultation here: https://oandgaccounting.com/appointment-booking-form/
