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Help for friend with USA Tax

I have been doing some research on the internet into the USA tax system for the self employed. I have a friend in Nevada. I work in the UK system every day but I am not sure if things like taxable deductions for costs are the same here and there. Also I believe there is an extra tax for the self employed but that half of this is reclaimable. I am also not sure if paying into Medicare via tax will entitle my friend to medical treatment as he curently thinks he doesnt qualify. Any help appreciated or even a link to a decent website.


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30th Jan 2012 20:33

can't answer on one foot

but just to provide some hints:


1) US Residents (and non resident Citizens) are taxed on their worldwide earnings, usually twice. Once by the Federal Government, and once by the State government. 44 States impose Income Tax - Nevada is not one of them, so he won't need to file a State return unless he has income from other states.

2) The "extra tax for Self Employed people" is what we would call class 4 NI. Unlike the UK, that rewards the self employed with a NI rate of 9% (lower than combined class 1), in the US, self employed people are required to pay both 'Ers NI and 'Ees NI. This works out to 13.3% on all earnings above $400 in a year. (2011) Increasing to 15.3% from tax year 2012. After $106k, this reduces to 2.9% (2011) They are thus in a worse financial situation than an employee, who only needs to pay half. (The employer pays the other half). Therefore, half can be written off as a business expense (technically, an above-the-line deduction).

3) Paying into Medicare (for at least 10 years) will entitle him to Medicare coverage when he reaches the age of 65 or becomes disabled (if earlier). It will not help him now, unless he's old enough.

4) Generally, allowable expenses are similar to here, but not identical. Use of home as office is much harder over there; the room has to be exclusively for business use, unlike here where this is not the case.

5) Depreciation is allowable for tax, but CAs are not as good.


I would really really suggest that your friend speaks to a CPA or an EA who would be able to help. I would be happy to help (I am an EA), but realistically he would probably find someone cheaper over there. Be aware of tax-franchises who employ unqualified (unskilled) tax preparers for minimum-wage. You get what you pay for.

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30th Jan 2012 20:58

thank you

Thanks for your advice. I think its come as a shock as he hasnt been self employed before. In reality in this country he wouldnt pass for being self employed as he is really an employee in my opinion. Unfortunately Nevada employs 'at will' so no employment contract, no holiday, no bank holiday, like it or lump it. As for expenses he said he can claim a bulk amount or itemise. He spends a lot on bus fare. In this country if his base was his home he could claim bus fare but reading their guidance I am not sure he could do that there. Thanks for your help.

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31st Jan 2012 10:55

false Self Employment

Similar to the UK, it is illegal to claim to be self-employed if really employed. The "badges of trade" are similar to here.

Just like in the UK, there are ways of avoiding NI by trading through a limited company (small salary, large dividends), the same can be done there too (although it is not as easy as here - for example, in the UK you could take £5000 salary and £100000 dividends, when the market rate is, say £75k pa. In the US, you'd have to take at least a market rate of salary, and the rest in dividends.


Here in the UK, we don't appreciate how good we've got it. Anti-avoidance there is far tougher than there.

If the income he's making is significant, it is worth considering a corporate structure. I'd be happy to set up (I form and manage corporations in all States) and assist. PM me if you're interested.

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01st Feb 2012 11:41


His Income is not high. I am quite shocked at the pay rates in Nevada, although the cost of housing is cheap. Its not worth him doing anything as the amounts dont warrant it and as I said, its not really a slef employed position, just someone who wont take on employees and they are paid commission only with no entitlements under the 'at will' legislation that is is place in Nevada. He is looking to move back into regular employed work shortly so this shouldnt be an issue again.

Thanks for your help.


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