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Moving to the USA/ Self-employment
Thread poster: Claudia J.
Claudia J.
United States
Local time: 20:23
German to English
+ ...
Jul 16, 2008

Dear All,

I was wondering whether some of you have relocated to the US from another country and have continued or started working as freelancers/self-employed in the USA.

I might have to relocate at the end of the year/early next year and I am wondering about whether it is even possible to survive as a self-employed person in the USA given the heavy taxation for self-employment.

What formalities does one have to go through as a foreign national and in general to get established?

Also I would like to take my German clients with me, giving them the opportunity to keep paying me in Euro into a German bank account. Does anyone know how this will work as far as taxes in the US go? I mean the currency exchange rate changes over time, so what will the money accruing in the German account be taxed like? (exchange rate at the time of payment or exchange rate at the end of the year/time of filing taxes?)

What about the self-employment tax? Why do I have to pay social security and medicare taxes if I am planing to get my own health insurance and build my own retirement/security funds?


If you can think of anything else I'd be very happy to hear about it....

Thanks so much in advance.

Best regards
Claudia


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Gisela Greenlee  Identity Verified
Local time: 19:23
German to English
+ ...
Moving to the US Jul 16, 2008

Hi Claudia,

here is what I know for most of your questions:
Yes, you will be required to pay self-employment taxes. This does not povide you with ongoing health insurance, so as you already mentioned, you will need to obtain your own private health insurance, but it does provide you with disability insurance, social security benefits for your "golden years" as well as health insurance in old age and during times of disability. To the best of my knowledge, you will have to report your income in Germany and you will probably need to look up the exchange rate when you receive payments, but I'm sure that a short consultation with a tax advisor can shed some more light on this. FYI, half of your social security taxes are tax-deductible, and all of your health insurance premiums are tax-deductible, so this lightens the tax burden quite a bit.
Good luck!


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Henry Hinds  Identity Verified
United States
Local time: 18:23
English to Spanish
+ ...
Not much advice, but... Jul 16, 2008

You definitely need some expert help on this one. Not the least of your problems is US immigration, which is not a simple matter at all. In fact it is overwhelming. So I'll go to the only one I know about which is the least important.

"What about the self-employment tax? Why do I have to pay social security and medicare taxes if I am planing to get my own health insurance and build my own retirement/security funds?"

Good question. We could all ask that. The answer is, the government does not trust us to do that, and for good reason. We blow all our money, end up on the street and then the government has to take care of us, right? So they make us put our share into the pot. I hear they do that in Europe as well only more so.

At this stage of life I am glad it did put in my share. Today I collect a pension and I have full medical coverage, which privately is extremely expensive, especially as you age. And unlike many of my compatriots, I have also built my own retirement/security funds and continue to work so I'm better off than the rest.

What has to be paid amounts to 15.3 percent of 92.35% (I think that's right) of gross self-employment earnings, in addition to income tax that is quite variable depending on total income. A person with an employer only pays 7.65% because the employer pays the other 7.65%, but the self-employed get to pay it all.

You also might ask that as a foreigner, say you work in the US a number of years then leave again, do you get any benefits from these taxes you have paid? Or do you get a refund? Dream on, but the answer is a very emphatic NO!


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Terry Richards
France
Local time: 02:23
French to English
+ ...
Taxes are not bad in the USA... Jul 16, 2008

...if you do them right. An accountant is well worth it and will cost you about $3-400 / year and save you much more than that.

It sounds to me like you would be able to register as a sole proprieter which is a very simple tax regime where you make 4 quarterly estimated payments and then it is all balanced out at the end of the year. There is no self-employment tax as such - you are just taxed as an individual. Just about any business expense can be written off. Consumables and expenses the same year, capital equipment over several (10?) years.

Yes, you do have to pay social security.

The biggest problem is that you have to be at least a permanent resident (have a "green card"). You can't work at all (or only very limited circumstances) on a tourist or education visa and a work visa is tied to a specific employment.

Currency conversions are normally done at the time you file but you can "adjust" a bit.

Terry.


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Claudia J.
United States
Local time: 20:23
German to English
+ ...
TOPIC STARTER
Thanks Jul 16, 2008

Thank you for the info so far.

As far as immigration goes that's a whole 'nother story. My partner of 5 years is American so I'm covered as far as that's concerned.

Back to the SE-tax. So basically with income tax and SE-tax I will be dishing out about 45% of my income to the state, correct? That's much more than in Europe actually, because in Europe I am responsible for my own social security and health care and don't have to pay a state tax for this in addition to any private insurances I might want because Medicare and social security is certainly not going to pay for everything I will need throughout life.

In Germany the first approx. 8000 Euro of gross income are also "free" (i.e. not taxed) so basically taxes in total amount to maybe 25% plus maybe 5% of income for health insurance if one is privately insured.

So I guess I am looking at 45% + private health insurance etc. in the US vs. 30% total in Germany, right? I don't understand anymore why everyone always says taxes and all are so much less in the US.

Or am I not understanding the SE system right? What does Medicare cover and when does SE step in? Does it give me any retirement benefits? If so, what do they amount to?


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MGL  Identity Verified
Netherlands
Local time: 02:23
Russian to English
about a year and a half ago Jul 16, 2008

I moved from Russia, where I was an in-house employee, back to the US, where I started freelancing full-time.

After not even having to think twice about tax, now I have to think about it quite often.

In my personal experience, I would HIGHLY recommend, if at all possible, moving at the end of the year so as to avoid moving after the tax year has already started. This one factor cost me quite a bit extra due to wierd complications and rules, and I literally had a group of professionals trying to figure it all out.

But otherwise, I generally set aside 22-25% of my monthly earnings.

Henry is right, you'll want to have your own accountant or tax advisor.

I would also like to highly recommend this book, which has been very helpful:

Self-Employed Tax Solutions by June Walker
http://www.amazon.com/Self-employed-Tax-Solutions-Recordkeeping-Self-Employed/dp/0762730714/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1216217249&sr=8-1

As a foreigner, I don't think you're going to have any special rules (other than your residency status?). Just start sending in your quarterly estimated tax payments with the vouchers and curse it like the rest of us The US is an equal-opportunity taker of taxes

In terms of banks, you're probably going to get screwed some on the exchange rates. But I *believe* income will be taxed by the rate as of date of payment. I'm sure someone will correct me if I am mistaken.

Good luck planning and completing your move, I know how stressful and chaotic it can be!


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Claudia J.
United States
Local time: 20:23
German to English
+ ...
TOPIC STARTER
no SE-tax? Jul 16, 2008

Dear Terry,

you said that as a sole proprietor I would not have to pay SE-tax. But everywhere I look it says that one has to pay SE-tax. So where did you find this info? Why would not everyone avoid paying an additional 15% if it was that easy?

Sorry if I misunderstood something.


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Daina Jauntirans  Identity Verified
Local time: 19:23
German to English
+ ...
It is possible to get benefits Jul 16, 2008

The details are a bit foggy for me at the moment because I don't have the paperwork in front of me, but there is an agreement on pensions/Social Security between Germany and the US. Recently, a friend and I got refunds of the money we paid into the German pension system. We met the requirement of being US citizens who had worked in Germany for less than 5 yrs. and had been out of Germany for at least 3 yrs. The other choice I had was to have my time in Germany counted toward my Social Security, but I opted for the payout. I am not sure whether this works exactly in the reverse for German citizens. You can poke around the Rentenversicherung Bund Web site for more information, particularly the Ausland und Rente section:
http://www.deutsche-rentenversicherung-bund.de

Regarding the pension and health insurance issue, even with Social Security and Medicare (which only kicks in when you are 65 or older; Medicaid is the health insurance plan for low-income individuals), I have to buy private health insurance and pay into retirement plans. Private health insurance can be quite costly (going up all the time) and sometimes difficult to obtain, depending on your health - that is not a benefit of freelancing in the US for sure. I loved my health insurance in Germany. Are you married to an American? Getting on an employed person's insurance is better than obtaining private. We will be switching to my husband's soon, and it will save us over $100/mo. and provide much better benefits.

As for the payments into your German bank account, I am not sure which exchange rate is used for tax purposes. I receive payments into my US account, so the exchange rate doesn't matter. I am simply taxed on what lands in my account in US dollars. Here is some information about reporting foreign bank accounts to the IRS (over $10k in value) - http://www.irs.gov/businesses/small/article/0,,id=148845,00.html and the relevant form http://www.irs.gov/pub/irs-pdf/f90221.pdf (for purposes of this form, the applicable exchange rate is the year-end exchange rate).

I would also advise seeking out an accountant well-versed in small business issues. Finding one who is knowledgeable about international issues is difficult.


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MGL  Identity Verified
Netherlands
Local time: 02:23
Russian to English
oof! Jul 16, 2008

Claudia Nitzschmann wrote:


So I guess I am looking at 45% + private health insurance etc. in the US vs. 30% total in Germany, right? I don't understand anymore why everyone always says taxes and all are so much less in the US.



sheesh, if it were that high, I doubt anyone would be doing it.
It comes to about 25%
You have federal, then state, and then the SE tax, and it all combines to put you anywhere between 22-25%.

Private health insurance is another thing altogether. I could go on and on about how much it sucks, but that's not very helpful. I would urge you to do two things as you prepare for your move:
(1) Before you leave, get your insurance company in Germany to provide you with an official letter confirming the period during which you were/are covered by them. You will provide this to your insurance company over here, if they deign to acknowledge it, so as to minimize the infernal "preexisting condition" clause. (I have received conflicting information - some companies seem to count non-US coverage, some don't).
(2) Start shopping for your new insurance NOW. I can recommend www.ehealthinsurance.com (you will need to know the zip code of the area where you plan to live).


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Henry Hinds  Identity Verified
United States
Local time: 18:23
English to Spanish
+ ...
How much? Jul 16, 2008

"I will be dishing out about 45% of my income to the state, correct?"

No, the self/employment tax is 15.3%, but the income tax is impossible to predict because it depends on so many other factors. There are many deductions and allowances, so unless you make a real pile, it would not even come close to 45%.

Now that you mention "the State", in the US we do not use that as an overall term for "the Government" because we have the Federal Government and 50 States plus DC, PR and Guam, etc.

You will be well advised that most of the 50 states do charge income tax also, but some do not, such as Florida and Texas and about 5 more. I live in Texas and I like that!

But be prepared for high health insurance, which will only go higher. Thank God for Medicare, but you have to live to age 65 to get that! Before that you are out of luck.


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Daina Jauntirans  Identity Verified
Local time: 19:23
German to English
+ ...
Not so high Jul 16, 2008

Claudia Nitzschmann wrote:
Back to the SE-tax. So basically with income tax and SE-tax I will be dishing out about 45% of my income to the state, correct? ...
So I guess I am looking at 45% + private health insurance etc. in the US vs. 30% total in Germany, right? I don't understand anymore why everyone always says taxes and all are so much less in the US.


I am incorporated (S-corp.) and my tax rate is in the neighborhood of 25%. As Giselrike said, 1/2 of the self-employment tax and health insurance premiums are tax deductible, as are all of your business expenses (do some research to see what those are). I also have dependents, so that affects things, too. My private health insurance is around 10% of my monthly gross, which compares favorably to Germany (in sheer price - the benefits are definitely less), I think, but is expensive compared to what some employees here in the US get.


Or am I not understanding the SE system right? What does Medicare cover and when does SE step in? Does it give me any retirement benefits? If so, what do they amount to?


Self-employment tax = Social Security + Medicare. Soc. Security and Medicare only kick in when you are 65 or older, or if you become disabled (not sure about the specifics of that). Once you have paid into the system for a certain amount of time, you will begin receiving a statement that tells you what your projected benefit will be. No one can tell you ahead of time what that will be, because it depends on what you earn over time.

Hope that helps!

PS Good luck with immigration!


[Edited at 2008-07-16 15:01]


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Claudia J.
United States
Local time: 20:23
German to English
+ ...
TOPIC STARTER
How does it come out to 25% total Jul 16, 2008

Thank you for the lively discussion and help.

Here is what I found for income tax:

25% $31,851 – $77,100

Thats only the income tax. So I would have to add the approx. 15% of the SE-tax plus possible state tax. So it would come out to at least 40%, would it not? How would the total come out to only 25%

As for health insurance: In Germany it is definitely much less for me than 10% of my monthly gross.


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Amy Duncan  Identity Verified
Brazil
Local time: 21:23
Portuguese to English
+ ...
Getting a green card Jul 16, 2008

Claudia Nitzschmann wrote:
As far as immigration goes that's a whole 'nother story. My partner of 5 years is American so I'm covered as far as that's concerned.


I've been through the green card thing with my ex-husband and my daughter's husband. When you say "my partner" can I assume you're not married? If you're not, you certainly have to be to get a green card, and even then it's no guarantee you'll get it. I don't mean to sound pessimistic, because if you are married and can prove that you're living with your husband when you arrive in the USA you'll most likely get it. But it is a very complicated, bureaucratic and time-consuming process.

I do wish you the best.

Amy


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MGL  Identity Verified
Netherlands
Local time: 02:23
Russian to English
here's what I've been told Jul 16, 2008

Claudia Nitzschmann wrote:

Thank you for the lively discussion and help.

Here is what I found for income tax:

25% $31,851 – $77,100

Thats only the income tax. So I would have to add the approx. 15% of the SE-tax plus possible state tax. So it would come out to at least 40%, would it not? How would the total come out to only 25%

As for health insurance: In Germany it is definitely much less for me than 10% of my monthly gross.



OK I just called my tax advisor

Federal, right now, is 15% if you earn within the range of $15-64K/year
AND SE is 15.3%, but the way the tax forms work is this: half of your 15.3% SE tax is CREDITED against your federal income tax rate, so you essentially pay something like 22.5% combined SE and fed.
Then, state taxes range from about 0 to 10% (zero in Florida and Nevada and some others, as high as 9.3% in California, depending on your income range).





[Edited at 2008-07-16 15:34]


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Ivonne Reichard-Novak  Identity Verified
United States
Local time: 20:23
Member
English to German
+ ...
A lot easier than in Germany Jul 16, 2008

Excellent answer from Megan.
I've been self employed in Austria (which is very similar to Germany) and I am self employed here. It is way easier to be self employed in the United States. Half the paper work twice the earnings - as tax really ranges around 22.5-30%. Then: if your future husband is employed and has health insurance he can add you to his insurance. It will not safe you from paying social security- but this is all in your ~25%! I'd definitely recommend getting the help of an accountant for the first year, though.

All the best!

[Edited at 2008-07-17 01:27]


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