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As the question stipulates. If a US citizen living in the USA wants to work for a foreign company he owns and that has no US entity. Is this legal?

He would basically be in a situation where he's doing everything as if he were residing in that foreign country but simply residing in the USA.

I know that the US consider taxable income to be income generated on american soil. So filing taxes in the US would be a requirement. But is the setup even legal? Or is it an obligation for the foreign entity to open a US entity and pay through it?

  • This is really too complex a problem to be answered here. If you are working FOR a company, then many states will expect that the company will be paying worker's compensation. Also, the Feds will probably want SS tax. – user3344003 Aug 23 '16 at 21:50
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You are mistaken: The U.S. governments (both federal, and states that impose income tax) assert a right to tax both:

  1. Income earned within their jurisdiction (e.g., "on their soil"), and
  2. Income earned by citizens (or residents, in the case of states).

So it is perfectly legal for a resident U.S. citizen to operate a foreign business entity, earn profit, pay himself, and even bank the money overseas.

However, a resident in such a situation would be in violation of tax law if he failed to report his interest in the foreign entity and his earnings, as prescribed by the IRS, on his tax filings.

  • Thanks! But does he file the income under foreign income or "local". Seeing as he resides in the US. That's the part that has me confused. Different countries have different definitions of what foreign income is. – D.Mill Aug 23 '16 at 19:35
  • @D.Mill - Presumably the foreign entity wouldn't be declaring the payments to the IRS. Therefore, the individual would list it as "Other Income," probably on a Schedule C. If you really care about the mechanics, the IRS has plenty of engaging reading on the subject. – feetwet Aug 23 '16 at 19:46

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