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Do Security Contractors Pay Taxes?

By Edited Nov 13, 2013 0 0

So you actually thought that all income earned overseas was tax-free?  For lack of a better term, LOL!  No matter how many times I hear that one, it always makes me laugh.  This is the United States of America, son:  there’s no such thing as tax free.  Every US citizen is required to file a tax return each year, no matter whether the income is earned in the United States or overseas.  You don’t have to like it, but that’s the law.

                Now here’s what the security company’s recruiter actually said, instead of what you wanted to hear:  “This position is eligible for the Foreign Earned Income Exclusion”.  That mouthful simply means that if you physically stay outside of the United States for 330 out of 365 consecutive days, then up to a set dollar amount of your earnings is exempt from income tax (In 2010, this amount was increased slightly to your first $91,500).  If you make less than that, you’ll have still have to file a tax return, but at least you won’t owe anything to the government.  But if you take in any earnings beyond that exempt amount, that extra money is going to be taxable. 

                Now let’s talk about the ways that a company might pay you.  The first, and most common method for US-based companies, is to hire you on as a contractor.  Beyond the monthly paystubs, you will also receive a 1099 form at the end of the year that lists all of your earnings, as opposed to a W-2 for a “traditional” job.  That 1099 will be the only paperwork that you’ll need to file a tax return, but be careful!  Taxes aren’t taken out with every paycheck, so it’ll be your responsibility to settle up with the government in one lump sum at tax time.  Make sure to keep putting away enough savings to cover this bill.  That being said, being paid as a contractor is very desirable because of the additional tax advantages.  It’s very easy to incorporate yourself into a security company, which means that you can write off business expenses for things like travel, training, and equipment.  If you go this route, you can also develop a work history in case you want to branch out and grow your business in the future.

                The second way that you might be paid is as an employee of an international company, most likely based out of Dubai.  KBR and Dyncorp have both done this in the past as a way to reduce their tax liability, since the United Arab Emirates has very business friendly tax laws and employment practices.  If this is the case, you won’t receive any 1099 form at all, since a foreign company is under no obligation to provide information to the United States government.  But make sure to hang on to your monthly paystubs!  They’ll probably be the only record of your earnings, and also of your employment.

                Last, many companies still used the “traditional” method of withholding taxes, almost like full-time employment but for a fixed period of service.  This is particularly true in the case of jobs requiring security clearances, or positions involving shorter deployments overseas.  If this applies to you, you’ll have income tax deducted from each paycheck as usual, and can expect to receive a W-2 at the end of the year.  If you manage to stay outside the United States long enough to qualify for the Foreign Earned Income Exclusion, the tax-exempt money will be returned to you in the form of a refund.

                Is this starting to sound complicated?  It can get that way pretty quickly, especially if you have dependents or business expenses to itemize.  My best advice to you is to always save your payroll information for up to 5 years, and seek out referrals from your buddies for a qualified international tax preparer that they’ve used in the past.  And before you commit to having them prepare your return, make sure to ask them how familiar they are with IRS Code 911 and working with expatriates.  Don’t even waste your time checking in with H+R Block or any of the big chains, they’re just not trained in these sections of the tax code. 

Remember, you might pay anywhere between 200 and 500 dollars each year to have your taxes prepared and filed by a qualified expert, but it’s an investment that will save you thousands of dollars in the long run. 

               


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