Working as a freelancer overseas, but US Citizen, what is my tax situation?

Question

My friend X is an US Citizen, working in the software space as a freelancer.

X is currently physically located outside of the US (and has been so for the vast part of the current 2015-2016 tax year).

While X works physically outside of the US, the money X earns is wire transferred to X's US bank account.

X also has employees where he is (overseas), but has not technically created in a company (either with the US or the country he is in).

What is X's tax situation? Who should X consult? It's a complex situation perhaps and X would like to avoid a heavy hit tax-wise this year.

Should X form a company, would that save X in taxes? Or is it too late since the tax year will be coming to a close soon?

Can X even pay taxes from outside of the US?

Answer 1

This person must pay taxes in both the overseas country and in the U.S. This is unusual; generally, only the U.S. demands this. Depending on the specific country, he would likely not be taxed twice as the U.S. generally recognises tax paid in a different country. Note there are some gotchas, though. For example, although Canada has a generally higher tax scheme than the U.S., you may still end up owing tax if you use the Tax-Free Savings Account system in Canada, as that is not recognised in the U.S.

As to whether or not this person should form a company, that is far too broad a question. It's going to depend in large part on the tax situations of the countries involved. This person needs to consult an accountant specialising in this situation. That is, on personal versus business tax and on tax involving U.S. citizens.

Yes, this person can and indeed must file and pay taxes in the U.S., from outside the U.S.