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I work as an independent contractor developing software for various organizations in the USA. I usually bill a client an agreed upon amount and provide some specific service in return. For what it's worth, the software I create could be considered a "product", if that is relevant to my question.

I operate my business as an S-Corporation of which I am the sole member. (I hope to take on big enough projects to hire employees in the future!) Payment for services rendered by me is paid directly to my corporation, which in turn, pays a salary to me.

For those of you not familiar with S-Corporations, they are a legal construct in the USA where a person or small group owns a company; the company's profits flow directly to the shareholders; avoiding the "double taxation" that some businesses are subject to.

I would like to know how my company and I will be affected tax-wise in the event that I provide services to and receive payment from a client in a foreign country.

Suppose that at ACME pays me USD 20,000 in return for development of software to monitor a road-runner trap. In the course of providing this service, I travel to ACME HQ at a cost of $1000 and rent an automobile and an apartment for a month at a cost of $2000. Therefore, my total business expenses for this engagement are USD $3000.

If ACME were in California, I would pay taxes on USD 17,000 because I had revenue of 20,000 and expenses of 3,000.

Suppose that ACME is in Britain (or anywhere else for that matter). My revenue and expenses are the same, but now my money has been earned and my expenses incurred in a foreign country.

How will my company and I be taxed? What do I need to bear in mind when I set up the business contract? Does it even make sense to use my S-Corporation to do business in a foreign country?

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Be careful here:

If ACME were in California, I would pay taxes on USD 17,000 because I had revenue of 20,000 and expenses of 3,000.

To CALIFORNIA. And California taxes S-Corps. And, in addition, you'd pay $800 for the right of doing business in the State. All that in addition to the regular Federal and State taxes to the State where you're resident.

Suppose that ACME is in Britain (or anywhere else for that matter). My revenue and expenses are the same, but now my money has been earned and my expenses incurred in a foreign country.

Same thing exactly. Except that you'll have to pay taxes to the UK. There may be some provision in the tax treaty to help you though, so you may end up paying less taxes when working in the UK than in California. Check with a licensed tax adviser (EA/CPA licensed in your State) who won't run away from you after you say the words "Tax Treaty".

Does it even make sense to use my S-Corporation to do business in a foreign country?

That should be a business decision, don't let the tax considerations drive your business.

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  • What is this $800 amount you mention at the beginning of your answer?
    – Vivian River
    Jan 14, 2015 at 16:29
  • California franchise tax that any corporation/llc/llp/lllp/lp operating in California is liable for. Even if you do business in California for 1 day - you're on the hook for $800 a year until you declare you're no longer doing business in the State.
    – littleadv
    Jan 14, 2015 at 16:30
  • I don't see why you would owe taxes to Britain. Can you elaborate?
    – brt
    Dec 19, 2016 at 10:17

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