Small Business Owners and Single-Member Limited Liability Company (SMLLC) Tax Filings | Expats in Colombia
Our team at USATax.co is specialized in assisting self-employed U.S. taxpayers, whether small business owners or single member LLCs, while living in Colombia.
Sole proprietorships or single-member limited liability companies (SMLLCs) are the business entity of choice for most self-employed entrepreneurs.
Generally, a sole proprietor is a small business owner, including freelancers or contractors who were issued a 1099, self-employed individuals, solopreneurs, and digital nomads. In Colombia, there has been a steady increase over the past decade of U.S. small business owners taking up residency. Software engineers, outsourced sales professionals, those based in the tourism industry, and many more who are able to earn in dollars and live on pesos, are enjoying the low cost of living and high quality of life that Colombia has to offer.
For federal tax purposes, SMLLCs who have incorporated in one of the 50 states also have the same filing requirement as small business owners mentioned above.
If you find yourself earning a living while outside of the United States, you will need to establish a basic understanding of what are your obligations as a self employed expat, and work with a professional to navigate the nuances of taking entrepreneurship to an international level.
Books and Records | Expats in Colombia
The first requirement for tax filing as a sole proprietor or SMLLC is to keep track of your profits and losses, reported through incomes and expenses on your Schedule C. You will only owe tax over the profits that you made, so whether you use a simple excel sheet or a professional system like quickbooks, proper books and record-keeping is extremely important.
In the eyes of the IRS, it doesn’t matter where in the world your income comes from, or where in the world you keep it, i.e. in a U.S. bank account, Colombian bank account, or cash under your mattress. You are obligated to report on your worldwide income, and if you would like to verify you can see it even states that inside your U.S. passport. Additionally, your tax preparer may need to know details on where your money was sourced, or where you physically were when you received the income, so it is good to maintain records of this as well.
Proper record-keeping of expenses is critical for small business owners. Remember that you need sufficient documentation that can include receipts, sales invoices or mileage logs, which you should hold onto until the statute of limitations runs out on that tax year. We suggest scanning your receipts or invoices with software like TurboScan or Cam Scanner easily from your phone.
Make sure to keep your eye out during the year for Colombia-specific expenses, deductions, and considerations you want to account for when it comes time to file. For example:
If you are doing business in Colombia you are likely earning or spending in Colombian Pesos. The IRS only accepts currency conversion with an approved yearly average, so properly doing your COP to USD conversion is required. There have been high fluctuations in the Colombian peso since COVID started, and it is more important than ever to ensure you get this conversion correct.
Self Employment Tax vs. Income Tax | Expats in Colombia
When most self-employed individuals think of taxes, they usually will think of annual income taxes which is just one part of your tax obligation as a small business owner.
During your annual filing, you or your tax preparer will report through profits and loss on a Schedule C along with your 1040. Even though you file only once per year, the IRS expects small business owners to pay quarterly estimated taxes, every quarter.
If you are a tax resident in Colombia and report and pay to the DIAN, the good news is that you may not owe any quarterly estimated income tax due to tax credits or income exclusions that will be applied on your annual 1040. However, you must seek the advice of a licensed tax professional for your specific situation as each taxpayer’s requirements are unique.
In addition to income tax, self-employed individuals must also keep in mind that they are obligated to pay self employment tax. This is equal to 12.4% of their profits for social security and 2.9% of their profits for Medicare, about 15.3% over the net profit.
It may come as a surprise to find that U.S. small business owners in Colombia, regardless of having no physical connection to the U.S., will have to contribute over 15% of their profits as a self employment tax, but this is something you want to take seriously. Aside from penalties that may be accrued for failure to pay, or for underpayment, it is critical for you to contribute in order to receive your social security checks during retirement! There is no tax credit or legal avoidance strategy you can use to not pay self employment taxes.
Small Business Owners: Trust USATax.co to be Your Partner for Your Tax Needs
If you’re a U.S. self employed expat in Colombia looking for a partner to help you make your solo business journey successful, contact us to schedule an appointment.
Our USATax.co team includes experienced and licensed tax professionals who can offer you unparalleled experience to help teach you what it takes to be a successful international solo business owner.