How to Pay Yourself from a US LLC When You Live Abroad

If you own a US LLC and live outside the United States, the way you pay yourself is not the same as it is for someone running the same business from Ohio. Get it wrong and you can accidentally disqualify yourself from a tax break worth around $130,000 a year. Get it right and your LLC can work better for you abroad than it does for most domestic owners.

This is one of the most common planning mistakes we see at Online Taxman, and it comes up across clients in over 93 countries. Here is how it actually works.

The Owner’s Draw: Simpler Than You Think

A single-member LLC is what the IRS calls a disregarded entity. That means for tax purposes, you and the business are treated as the same taxpayer. The LLC does not have its own tax identity. You do.

Because of this, you do not pay yourself a salary from a single-member LLC. You do not run payroll, issue paychecks, or withhold taxes from yourself. Instead, you take what is called an owner’s draw: you move money from the business bank account into your personal account.

The important thing to understand is that the owner’s draw itself is not a taxable event. The IRS does not tax you when you move the money. They tax you on the profit your business earns, whether that money sits in the business account or has already been transferred to your personal account. This is the first thing most people get wrong. Leaving money in the LLC does not defer the tax. The profit is taxable when it is earned, not when it moves.

In practice, a clean draw process looks like this: pick a regular cadence, the 1st of the month or the 1st and 15th, transfer from the business account to your personal account, and note “Owner Draw” in the memo line. Keep a simple log of the date and amount. That paper trail matters if your books are ever questioned.

One note for those living outside the US: if you are a tax resident of another country, check how your local jurisdiction treats LLC distributions. Some countries, Brazil being a common example, do not recognize the US disregarded entity concept. They may treat a transfer from the LLC to your personal account as a taxable event locally, even though it is not one in the US. This is worth confirming with someone who knows both systems.

And if you do not yet have separate business and personal bank accounts, that is the first thing to fix. Mixing funds weakens the liability protection the LLC was set up to provide and creates a bookkeeping problem at year-end.

The FEIE: The Tax Break Most Expat LLC Owners Miss or Misuse

Once your LLC is earning money abroad, the most valuable tool available to you is the Foreign Earned Income Exclusion, known as the FEIE and filed on Form 2555. It allows qualifying Americans abroad to exclude roughly $130,000 of earned income from US federal income tax each year.

To qualify, one of two conditions must be met. You are either physically outside the United States for at least 330 days in a 12-month period, which satisfies the Physical Presence Test, or you have genuinely established your life in another country, which satisfies the Bona Fide Residence Test. The second test is less mechanical and depends on the full picture of where your life is actually centered.

Two details catch people. First, the FEIE applies only to earned income, meaning income from work you actively perform. LLC profit that flows from services you provide typically qualifies. Rental income, dividends, and other passive sources generally do not. Second, the FEIE does not reduce self-employment tax, which is the 15.3% that covers Social Security and Medicare. That obligation remains unless you live in a country that has a totalization agreement with the United States. Note that totalization agreements are separate from tax treaties and cover specifically the Social Security side of the equation. Countries including the UK, Germany, Spain, Italy, and several others have these agreements in place.

A quick self-check: count the days you have been outside the US in the past 12 months. If the number is over 330, you likely qualify under the Physical Presence Test. Under 330 does not automatically disqualify you, but the Bona Fide Residence path requires a closer look at your specific situation.

The S-Corp Question: When the Standard Advice Gets Expensive

At some point, most successful LLC owners hear the same recommendation from a domestic CPA: convert to an S-Corp to save on self-employment tax. In the United States, this is often good advice. For Americans living abroad, it frequently is not.

Here is the logic behind the recommendation. As a regular single-member LLC, every dollar of profit is subject to both income tax and self-employment tax. When you elect S-Corp status, you split your income into two buckets: a salary you pay yourself, which is subject to payroll taxes, and profit distributions, which are not. The idea is to set a reasonable salary and take the rest as distributions, reducing the portion subject to self-employment tax.

The problem for expats is that S-Corp distributions are not earned income. The FEIE does not apply to them. So the portion of your income that the S-Corp conversion was supposed to shelter from self-employment tax is also the portion that loses its eligibility for the $130,000 exclusion. What looks like savings on one side often costs more on the other.

We have reviewed hundreds of expat returns where this played out badly. A client’s previous accountant, following standard US domestic logic, had converted the LLC to an S-Corp. The client lost a significant portion of their FEIE benefit because only the salary portion, typically set lower than total profit, qualified for the exclusion. The accountant was not wrong for domestic purposes. They simply did not know the international layer.

A rough rule of thumb: if your annual business profit is under $100,000 and you are living abroad full-time, the S-Corp conversion is usually the wrong move. If a CPA recommends it, ask one direct question: “Have you modeled this including the FEIE impact?” The answer tells you quickly whether they have experience with the international side.

That said, there are cases where the S-Corp does make sense for an expat. If your profit is high enough that you can take a full $130,000 salary, qualify that full amount for the FEIE, and still have significant distributions above that threshold, the self-employment savings on those upper distributions can make the math work. It also makes more sense if you live in a country with a US totalization agreement, or if a meaningful portion of your income would not have qualified for the FEIE regardless. The answer is situational, which is why generic S-Corp advice applied to an international return tends to be costly.

Three Mistakes That Lead to IRS Letters

Beyond the pay structure and entity decisions, three common compliance gaps tend to catch expat LLC owners off guard.

The first is mixing personal and business funds. Paying personal expenses directly from the LLC bank account is not the same as taking a clean owner’s draw. It weakens the legal protection the LLC provides and creates a bookkeeping mess that is expensive to untangle at year-end. If you see personal grocery runs or subscription charges on your business account, that is the first cleanup project.

The second is FBAR. If your foreign bank accounts, including any accounts held by your LLC abroad, reach a combined balance of $10,000 at any point during the year, you are required to file a Foreign Bank Account Report. This is FinCEN Form 114, separate from your tax return, and the penalties for missing it can start at $10,000 per account per year for non-willful violations. The test is simple: add up the highest balance each foreign account reached during the year. If the combined total crossed $10,000 even for a single day, you have a filing obligation. If you are behind on prior years, the IRS Streamlined Procedures may allow you to catch up with significantly reduced penalties, but you need to come forward before the IRS finds the gap.

The third is state tax residency. Some states are aggressive about claiming you remain a resident even after you have moved abroad. California, New York, New Mexico, and Virginia are the most notable. If your LLC is registered in one of those states and you still hold a driver’s license there, remain registered to vote, or have an ongoing lease, you may continue to have a state filing obligation for years after you left. One practical option worth knowing: if your LLC is registered in one of these states, you can often domesticate it to a more favorable state like Wyoming without forming a new entity, obtaining a new EIN, or opening new bank accounts. That process moves the jurisdiction of your existing company rather than replacing it, and it removes the ongoing state tax exposure.

A 24-Hour Action Plan

Five things you can do before tomorrow that require no CPA:

1- Open a dedicated business bank account if your personal and business funds currently share one. Everything else depends on this separation being in place.

2 – Set a draw schedule and stick to it. The 1st of the month works well. Label every transfer “Owner Draw” in the memo line and keep a simple log.

3 – Count your days outside the US in the past 12 months. If the number is over 330, the FEIE is likely available to you and worth understanding fully.

4 – Add up the highest balance each of your foreign accounts reached this year. If the combined total crossed $10,000 for even one day, you have an FBAR to file.

5 – Check what state issued your current driver’s license. If it is California, New York, New Mexico, or Virginia, put cutting those state ties on your near-term list.

None of these require a call. All of them close gaps that cost expat business owners real money when they stay open.

If you have any questions or don’t know what applies to your situation, reach out. We are happy to help.