You’ve decided to take the leap and go abroad as a medical professional. Whether you created your own telemedicine private practice or are a contractor for other telemedicine companies, here’s what practicing telemedicine from another country means for your US taxes.
First, even if you no longer live and work in the US, as long as you’re a US citizen or greencard holder, you must still file a US tax return and potentially pay US taxes. Fortunately, the US tax code provides options to optimize your tax situation.
We explain each tax savings opportunity and how you can benefit.
You’ll learn the following:
- Save on Income Tax via the Foreign Earned Income Exclusion
- Use an S-Corporation To Reduce Self-Employment Tax
- Open An S-Corporation
- File Taxes For Your Telehealth Business
- Run Payroll And Do Bookkeeping
- Can a non-US person use an S-corporation to save taxes?
- Foreign Taxes When Practicing Telehealth From Abroad
- Optimize Your Taxes & Exclusive Discount
Save on Income Tax via the Foreign Earned Income Exclusion
American physicians working abroad can exclude up to $112,000 (2022 tax year, $120,000 for 2023) from US federal income tax if they meet one of the two eligibility tests. These are:
- Physical Presence Test – Spending at least 330 full days in a 12-month period in foreign countries.
- Bona Fide Residence Test – Being a resident of a foreign country with sufficient ties to prove residency and with clear intentions to continue to live in that country.
If you meet one of these two tests, you will be able to exclude the income you earned while in the foreign country from US income tax, up to the Foreign Earned Income Exclusion limit. Check out this Guide to the Foreign Earned Income Exclusion.
While this is a great tax saving, the exclusion only applies to income tax. Contractors or self-employed individuals must still pay 15.3% self-employment tax (Social Security and Medicare) on the entire net income. But there are ways to reduce this as well.
Use an S-Corporation To Reduce Self-Employment Tax
As a sole proprietor or even with a regular LLC, all income passes through to you as an individual and must be declared on your tax return. To reduce the taxable income for you as an individual, consider setting up an S-Corporation (or LLC Taxed as S-Corporation).
With an S-Corporation, the owner of the company must draw a salary, which can be lower than the full business income. The owner pays the 15.3% Social Security and Medicare tax on the salary (both the employer and employee portion); however, the remaining profits are exempt from these taxes.
This has two tax implications:
- The salary is typically lower than the entire business income. For most people, a reasonable salary is around 35-65% of the total net profits. Therefore, you would save Social Security and Medicare taxes on the other 65-35%.
- The remaining net profits of the business can be distributed freely, without further tax implications. Just make sure you don’t distribute more than the net profits, as when distributing more than your equity in the S-Corporation, e.g., taking a loan, that is taxed as a capital gain.
Of course, maintaining a business entity like an S-Corporation has a cost associated with it. You would need to file a corporate tax return, run payroll, and maintain proper books for the entity. We explain those in a moment.
In our experience, the tax savings generally outweigh the added cost of running an S-Corporation at around $35,000 of annual net profits. With higher net profits, the tax savings generally increase exponentially. Of course, every situation is unique, and we can help you with yours – at Online Taxman, we have been helping Americans abroad with their taxes for over 10 years.
Of note, a W-2 employee of a US company cannot use a passthrough entity to receive their W-2 salary. However, they can use the Foreign Earned Income Exclusion mentioned above to exclude up to $112,000 (2022 tax year) from federal income tax if they meet the requirements. They still need to pay the employee portion of social security and Medicare, which is typically already withheld by the employer.
Also keep in mind how your host country will tax your income – make sure to consult with a local tax advisor who can guide you.
How To Open An S-Corporation
If you already have an LLC or C-Corporation, you can elect for it to be taxed as an S-Corporation. To do this, you must file Form 2553 by March 15th to elect for S-corporation status for the current tax year. Late filing relief may be available, but we advise speaking with a tax advisor if you plan to do this.
To open an S-Corporation, you would typically first form an LLC and elect the LLC to be treated as an S-Corporation for tax purposes on Form 2553. When living abroad and providing services online, like telehealth services, we suggest incorporating your business in a tax friendly state, such as Wyoming.
If you’re already living abroad, you can still set up an LLC in the U.S. remotely.
To set up your business entity, you need the following:
- Business name
- Business address (preferably in the U.S., for banking purposes)
- A registered agent
- Full name, address, and SSN of all shareholders of the business
Once your S-Corporation has been set up, you will have to renew the entity on an annual basis to keep it in good standing with the state where it was incorporated.
You do that by filing a state annual report or franchise tax report and renew the registered agent service (if applicable). The filing deadlines for this requirement depends on the state of incorporation.
File Taxes For Your Telehealth Business
In addition to your individual tax return, you will also have to file an annual corporate tax return with the IRS.
The corporate return uses Form 1120-S. It is due by March 15th, starting the year after incorporation of the S-Corp.
For the tax filing, your accountant will need:
- Financial documents: Profit & loss statement and balance sheet.
- Corporate documents: Articles of incorporation, EIN.
- Shareholder information: Name, address, SSN and percentage of ownership.
Run Payroll And Do Bookkeeping
When taking a salary from your own company, you have to run payroll.
We highly recommend using a payroll service for this (such as gusto.com) to automate running payroll and the payroll related tax filings. Without a payroll service, this can be quite a tedious process.
Depending on your specific situation, you may be able to optimize your payroll. For example, you could reduce your federal income tax withholding if you are claiming the FEIE, or certain state tax withholding.
You also need clean books. Not only will it simplify the tax return preparation but also give you a clear picture of the health of your company in real time, making it easier to take advantage of money saving opportunities throughout the year.
It is advisable to use a bookkeeping software, such as QuickBooks or Xero, or engage a bookkeeping service. A professional bookkeeper ensures that your books are accurate and that no money is left on table.
Can a non-US person use an S-corporation to save taxes?
A non-US person, i.e, someone who is neither a citizen, green card holder, nor tax-resident of the United States, can open an LLC, but not an S-corporation.
Non-US persons above providing services from abroad to US clients don’t have to pay tax in the US as long as the service provider does not have a presence in the States. A presence would include having an office or someone who works in the US on solely their behalf, for example a marketing manager (this is called a dependent agent).
An LLC is a pass-through entity. This means that all income passes through to the foreign owner of the LLC. The owner will likely have to pay tax on income in their country of residence, based on local tax laws.
Having an US LLC would still provide benefits like liability protection and the ability to open a US business bank account.
Foreign Taxes When Practicing Telehealth From Abroad
When practicing telemedicine from another country, keep in mind that your host country might tax you as well. Consult with a local tax adviser to understand how the country you reside in taxes your business and personal income.
If you have to pay tax in another country, you can claim a foreign tax credit in the US. This credit is a dollar-for-dollar reduction of any tax due in the United States. You can even carry forward any unused foreign tax credit.
Optimize Your Taxes
There are multiple ways to reduce the US tax burden when living abroad and working online. While it can seem daunting to implement these tax strategies correctly, an experienced firm like Online Taxman can help with every step.
Online Taxman specializes in US taxation for Americans abroad and offers services from tax preparation to incorporation, payroll setup, and bookkeeping.
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Vincenzo Villamena, CPA, is the founder of Online Taxman and Global Expat Advisors, specializing in U.S. taxes for expats and entrepreneurs abroad. He has both a Masters of Accounting and Bachelors of Business Administration with distinction from the University of Michigan’s Stephen M. Ross School of Business.