How To Register A Business And Pay Taxes As An Independent TeacherJun 27, 2019
A lot of teachers come to me and they ask me this question that we're going to address in this article today, which is, "How do I register my business officially and then how do I pay taxes on my online teaching business?"
I’m not a lawyer. I’m not an accountant. And I highly recommend that you contact someone who is. Every year I get tax advice from people who work for local tax offices. I prefer to do my taxes through a well-known tax company with consultants who are readily available if I have questions, and I make amendments when and if necessary. I would recommend doing the same to avoid being audited. You can find these people in most cities, there are several companies that deal in taxes in the US, some of these offices are open only during tax season, some are available all year, either way you’ll want to schedule a meeting or two and bring a notepad to take notes so that you know what your obligations are.
“Ok, but how do I register?”
That’s a good question! A couple of things that you’ll want to consider are:
- where you live (residency)
- where you’re incorporated
Are you teaching English online for a company that’s in the US? Are you teaching using online meetings all on your own? Is the ESL Company that you’re working for headquartered in another country? Usually you’ll be considered self-employed for tax purposes, which has its pros and cons.
You might not have thought about this before, but if you live in one country and you don't do business there, you still become a tax resident. Maybe you haven't got a green card or any kind of immigration documents. You don't have a passport or a work visa. You don't have anything like that, but if you stay in a place long enough, you will become a tax resident. And what that means is that you might have to pay some taxes for living there for that period of time.
So, you need to know where you are considered legally a resident. And if that's your home country, then that should be a lot easier for you because you should be more familiar with the laws that surround that. But if you are a resident overseas or in a different country, then you'll need to find out about that. And you'll need to find out about how that's going to affect the teaching business that you want to set up and how it's going to affect you personally.
Incorporation of your business can happen in the country that you live in or it can happen in a different country. And, because I'm from the United States, I know for a fact that in the United States you can register a business even if you're not a United States citizen. So, it doesn't matter where you're from in the world, you can register a business in the United States and have a United States business.
Now, when we talk about taxes, that's going to be another question because then your company that's registered in the United States will need to pay taxes to the United States. That's something that you'll want to think about ahead of time.
If you’ve started to make a reliable income from teaching English online, you’ll set up an LLC, a Limited Liability Corporation. If you haven’t set one of these up, and something goes wrong, you can be sued for more money than you have and your property can be seized. (Ouch! Nobody wants that!) On top of that, you get more tax breaks with an LLC.
Read more about sole proprietorships, LLCs, and S Corps here.
“Oh no! I messed up!”
We all make mistakes, maybe you forgot some of your expenses, maybe you forgot a paystub, maybe there’s some other circumstance that your tax professional brought up. Well, that’s OK because you can make corrections with the IRS (in the United States). This is called an amendment and if your tax professional isn’t doing this for you upon request, you can usually do this via an app or request an amendment on the IRS website.
If you make money teaching English online, and you make a tax mistake, you can be audited. There are companies that usually provide legal representation, but be sure to read the fine print before hiring them, so that you know what services they provide. Read reviews to find the right company for you because it's going to be expensive, but it’s most likely going to be worth it.
How can I save some money?
Being self-employed in the U.S. in some capacity does have some advantages. For starters, you get your money up-front, you pay your taxes throughout the tax season and, until then, all of your money is yours. Additionally you get deductions and write-offs.
However, be aware that there are certain costs that come with teaching English. Maybe you teach online and you've bought a laptop that you use solely for Teaching ESL. Maybe you had to buy a webcam to go with it. You should document your business expenses and every penny you made so that you can bring that to your tax consultant because you may be able to save some money. I personally take screenshots of all of my received payment documents and receipts and I keep them in a special file.
Charity is something I think a lot of people want to do and, luckily, this can qualify you for an additional write-off. Donating to a qualified charity can contribute to your end-of-year write-offs. When you donate something you should receive a form with the value of your donation clearly written on it. You’ll want to bring this with you when you meet with your tax consultant.
“But I don’t want to do my taxes in the US.”
Let's face it, there are a lot of taxes you have to pay in U.S. and there are those who teach English in another country for this reason. If you teach English online that could complicate things, as the United States wants you to declare your total worldwide income when filing your taxes in exchange for the privilege of being a U.S. citizen.
Tax form 2555 is for people living overseas who pass the bona-fide residence test or physical presence test. If you would like to take advantage of this option, consult your tax professional on how to qualify for this because it can save you a lot of money.
Every country has its own rules for taxes. If you pay taxes in one country, you may not have to file in your home country. Your tax professional will be able to get this information for you.
Last but certainly not least, ALWAYS file your taxes! You want a paper trail that proves that you've been paying taxes and allows you to access lines of credit and work with banks and operate within the international financial system. Teaching English overseas or online does not exempt you from filing and putting it off or ignoring it will only lead to detrimental outcomes.
Sole Proprietorship, LLC, or S Corp?
OK, now let's say that you've already found out about residency and incorporation. I'm going to give you some examples from doing business in the United States and doing business in Russia. And then, you'll be able to see how that parallels with the country that you're in or the country where your business is.
So, first of all, how do you register and what kind of business should you register? Well, registering the business and paying taxes for the business kind of go hand in hand because, depending on what kind of business you register, you might pay a different amount of taxes. So, the first thing that you need to know is you probably don't even need to register a business to do business. OK. Most online teaching businesses don't require you to legally register any kind of business. You can do business as yourself, as an individual. Now, there are countries in the world where this is not acceptable and you must register your business legally. And for those kinds of places, you know, then you need to follow the laws there. But most places in the world, especially in the West, you can do business without officially registering a business.
And usually this is called a sole proprietorship. So, when you do this, when you set up this kind of business or you pay taxes on this kind of business, you are doing it as a sole proprietor. That's the kind of business that you have. In the United States you don't need to file any special documents or paperwork to become a sole proprietor. All you need to do is register that on your taxes. So, you need to announce that on your taxes. When you file taxes, you need to write that you're self-employed and then you need to announce how much you've made and you need to be honest about that. That's how the United States deals with it.
If you're a foreign citizen and you incorporate your business in the United States, then that's a different story and there are going to be different guidelines that you have to follow. But, in general, in most places in the world, you can start an online teaching business without registering any kind of legal entity and you will be considered a sole proprietor for the purposes of both registering a business and for paying taxes.
Now, paying taxes as a sole proprietor is less advantageous than paying your taxes as a company. That means that you'll probably pay more taxes just by doing business as an individual. A lot of times the reasons to incorporate your business, or to officially register your business, is to make your tax burden lower. Your tax burden is how much you'll have to pay at the end of the year or during tax season.
So, by opening a business officially, you can reduce the amount of taxes that you pay. And here's the first step that you'll probably take. After you've started making a reliable amount of money from your teaching business, then you'll probably want to incorporate your business. OK? Most businesses are incorporated and it's a sign of a professional, right, to have a real, official business that's registered with the government, that's incorporated.
And the way that you do that is you'll probably set up some kind of legal entity like an LLC, limited liability company. And an LLC gives you a little bit of protection because if there's some kind of problem with your company, then probably your company isn't going to be able to lose more money than it has. If you're doing business as yourself and there's some problem with your company and somebody takes you to court, well, then they can also take your personal money or your personal belongings because you need to pay them back or you need to compensate them for whatever the problem was. But if you're an LLC, then you're protected against this. You have limited liability. That's why it's called a limited liability company.
So, an LLC is usually the next step that someone is going to take after opening their business as a sole proprietor. And when you pay taxes as an LLC, you'll see that you're protected also because you can have some business expenses that you can write off. And this makes it a lot more convenient for you. Whereas before, anything that you separated, if you wrote it off, then that was just your personal expenses because all of the money is really just yours as a sole proprietor. But all of the money is split between you and your company when you become an LLC.
Now, this is where it gets a little more complicated with taxes because an LLC could file taxes in the United States in two different ways. It could file taxes as a sole proprietor. So, according to taxes, nothing might change when you set up your LLC. You just have a little more legal protection. But your LLC could also file taxes as an S Corporation. An S Corporation doesn't mean small corporation, it's just a term from taxes. S and C are two different types of corporations. Big corporations are usually called C Corporations. And smaller ones are S Corporations, but it's not a rule and it's not really about size. It's just about classification in the tax code.
And, so, if your LLC files as an S Corp, then you'll be able to save even more taxes and you'll be able to write even more off as business expenses. However, that's not something that people usually do in the first stages of their business. They usually do this once the business is already successful and it's running. So, they want to decrease their tax burden, like I was talking about before.
So, what is the simple answer to this question? How should you register your business and how are you going to pay taxes?
Well, here's what you should do. First of all, you should ask yourself the question, "Where do I have residency established and where am I going to incorporate my business?" And those are going to tell you the laws that you need to find out about the specific countries, states, regions that you're going to be doing business in or living in.
Then, after that, when you go to set up your business, no matter where you are in the world there's different types of legal entities or types of organizations that you can register with the government. And, when you go to do that, there's probably going to be some kind of legal entity that's very similar to an LLC. And when you register your business you'll want to register as an LLC and that's going to give you protection, while also not being a huge investment. If you don't have a lot of employees, if you don't have any employees, then why would you need to register a corporation or anything else? Alright? An LLC will be just fine and that's all you'll need. However, if you don't need to register it, if you're in a country where you can do business as a sole proprietor, then I recommend doing business with your online teaching business as a sole proprietor for as long as possible.
So, for me, my goal was that once I hit $3,000 per month, that's when I wanted to open up my LLC, my legal entity, and officially register with the government. And so that's what I did. And then, once I reached $10,000 or $15,000 or more per month, that's when I started thinking I really need to reduce my taxes. And I went to my accountant and I said, look, we need to pay taxes as an S Corporation, not a sole proprietor.
And, you know, my legal entity was still an LLC. That didn't change. Just the way that we filed taxes changed. So, this is something that your accountant should know about. And, once you get to that point, they'll be able to help you out with that. And I actually give you some more advice about this in our program called the Teaching Business Catalyst. So, the Teaching Business Catalyst program is where I help teachers set up teaching businesses either from scratch or grow their teaching businesses that they already have. And our main goal in that program is to get them to that point where they're between $5,000 and $10,000 per month recurring every month.