Self-employed tax repercussions

Hi all - reposted from another thread about Tre's intentions to be self-employed from Feb and the tax consequences:

Thanks as ever Larrabee

I'll try to give some more details in the hope that someone can point us in the right direction in terms of what steps we need to take to avoid the major pitfalls.

We intend that between us we will earn the income requirement for ILR from conventional permanent PAYE roles.  Ultimately we might look to both work for ourselves but we'll do that after ILR.  To my knowledge there are no income requirements for UK citizenship or renouncing US citizenship but if I need correcting on that let me know and we'll keep our conventional jobs a little longer!

Tre will be the sole employee at his business - he's renting the unit/space above a bar inclusive of bills and wifi and will have other small miscellaneous overheads that he can presumably offset against his earnings.  Profit will then be split between paying Tre a salary/pension/NI and leaving some in the business account to cover slower months, additional training courses, new equipment etc

So it feels as uncomplicated as a business can be...but I anticipate complications tax-wise.  It's a four-parter to me atm - Tre's salary for HMRC, Tre's salary for IRS, business reporting for HMRC, and business reporting for IRS.

HMRC reporting worries me less, as I imagine we can just report earnings minus expenses/costs, minus salary.  Reporting his salary will just be the usual income minus personal allowance/NI/pension contributions and pay 20% income tax on the remainder I figure.  I'm not sure how businesses are taxed by HMRC but I assume it's a similar system where you report gross earnings and offset any business expenses and get taxed a percentage of the net? Not sure if Tre's salary gets deducted as part of that?

Onto the IRS: For his salary, I'm hopeful we essentially do what we've been doing, and report the same amount to the IRS as we do to HMRC along with the tax paid to HMRC, and cite the Foreign Earned Income Exclusion and unless his business goes stratospheric there should be nothing additional owing.

Biggest 'but' is how the IRS will want to tax his business?  I'm crossing my fingers that there are similar arrangements in place such that we can report the same gross, net and tax paid figures as we do to HMRC and basically claim to have already paid sufficient tax in the UK - is that the case?
Given the timing, ie I think he'll officially open his doors on 1 Feb, I figure the IRS will want tax up until 31 Dec 2023, but we'll report to HMRC sometime after April this year and then not until April 2024, so it feels like there's some estimating to be done? Or can we defer submitting to the IRS until after we've submitted to HMRC in 2024?

If my worse fears are confirmed and IRS won't recognise business tax paid to HMRC, can anyone provide some guidance regarding our options to help ensure Tre's unfair taxation is minimised?

Thanks everyone! Happy to repost this in another thread if it belongs better elsewhere
G&T

My wife is self-employed, on a small scale, so can try to help. But key question up front - you talk about leaving money in the business, is there a separate business entity? My wife is a sole trader - effectively, she is the business and the business is her, there's not really any separation in the finances. If you've got a limited company (sounds like not a partnership), the rules are significantly different, I can't help there, although I know the IRS throws some complications about ownership of "foreign" corporations.

For a sole trader:

HMRC reporting is straightforward enough. Need to calculate revenue, take off expenses, the rest is taxable income. Self Assessment also calculates NI on that income.

IRS reporting is very similar. I don't know for sure how the FEIE interacts with self employment (we use the FTC, which works well here). You will need to consider self employment tax - you can choose to inform the IRS that you are paying UK NI and thus don't also need to pay US social security/medicare. That's a slightly separate process, involves getting a certificate from HMRC. Or you can choose to pay US self-employment tax and you'll build up Social Security contributions as well, some people choose to do this.

The dates are a big pain - effectively, we do a year-end close twice a year. Once for the US 01Jan-31Dec tax year, and once for the UK 06Apr-05Apr tax year. Both countries want you to include the income in the year you actually get it. You can defer filing US taxes until after the UK year is over, so you can do all the calculations at the same time (i.e. on 07Apr you calculate income and expenses for both tax years, but the numbers you report to each country will be different). Easy to file a US extension so you aren't rushing to do this between 06Apr and 15Apr - just extend US taxes to October. If you were using the FTC, you'd want to make sure you file and pay UK taxes before 31Dec; not sure if there's any catch there for FEIE.

Both countries want estimated tax payments, if you're making/paying enough tax. Haven't had to deal with that yet, but certainly worth looking into.

The bottom line good news is that, despite the pain in lining stuff up, you don't have to pay double tax - in most cases, your US tax liability will be zero. The main opportunity for double tax is with NI + US self-employment tax, but you can get out of that.

Self-employment is reported in the US on Schedule C, Form 8858, plus Form 1116 (Foreign Branch) and/or Form 2555. A copy of a certificate of coverage from HMRC is attached to the US return each year.

Thanks Tubaleiter and Guys

Can anyone advise on the benefits or drawbacks of registering the business at Companies House?

Thanks
Greg

There are UK tax benefits from having your own limited company - primarily being able to pay dividends (lower rate of income tax), albeit the company pays Corporation tax (@19%) on the pre-dividend profits - there are multiple other considerations however (NI and pensions regulation for example) and are largely dependent on how much you want to do yourself vs employing an accountant to help you along the way.

The US tax filing is more onerous (more damn IRS forms!)  and can require some in depth knowledge to navigate through it all - or again using an accountant with expat tax knowledge..

Overall advice is to make sure you fully know what you're doing (all the pros and cons) before you decide to do it!

Hi all

Just wanted to pick up this thread.

Tre has a small business of his own now, and we need to submit his UK tax return to HMRC before January 2025 (HMRC's cutoff date for 2023-2024 taxes).

We want to to ILR in September, and citizenship asap after that, hopefully by the end of the year.

When's the best time to slot in doing the tax return? I'm not sure I'd want to do it while an application was pending in case it threw up questions, so maybe we're best to get it done this month before the ILR goes in? Or between ILR and citizenship?

In theory after citizenship is also possible but if that runs on past the end of January he'd be late with the return.

But if we do it now and HMRC have questions I don't want it jeopardising his ILR as that's the most important thing! So maybe do ILR on the one-week turnaround, then take a week to submit a tax return, then put the citizenship application in??

If anyone has any advice or experience it would be appreciated!
Cheers
Greg