Fema Employment

What is net salary for a US worker in Mexico?

I need to send my compensation requirements to company in Baja, Mexico. I need to understand the Mexican and US tax rates. Initial findings have indicated that a US citizen on an FM3 visa would pay approximately 30% income tax to the Mexican government with no double taxation. As far as US goes, to qualify for the Foreign Earned Income Exclusion we would need to be out of the country for 330 days within a 12 month period (starting May 1, 2007). The plan is to be eligible for FEIE making the first $82k of the comp tax free. What would the net compensation be - including any California state tax liability - on $200k gross earnings? Please explain your formula as I need to clear $50k per year after expenses. Also, what advice would you have in terms of legally optimizing the opportunity here? Is there a particular compensation structure that we should be pursuing? Perhaps being contracted as a US consulting company vs. employment? Many thanks!

Public Comments

1. Claiming the foreign earned income exclusion, you would be avoiding double taxation since you would be exempting a portion of your income (up to the annual limit) from US tax. For any income in excess of the annual foreign earned income exclusion limit, you can then claim the foreign tax credit to avoid the double taxation on the rest. You will be basically be subject to tax at the higher rate (US versus Mexico tax). If it turns out that the US tax rate is lower than the Mexico tax rate, you may want to be taxed by the US and NOT taxed by Mexico. Depending on the US tax treaty with Mexico, you may be able to avoid Mexico tax altogether. As far as optimizing the compensation structure, to maximize the foreign income exclusion, you may want to consider having a portion of the compensation treated as housing. On the US tax side, it really doesn't matter how the compensation is paid, since anything paid to you, or paid on your behalf, is considered taxable compensation to you. The foreign earned income exclusion is made up of two pieces, the foreign income exclusion and the housing exclusion. You can also exclude a portion of your housing costs in the host (non-US) location. While being paid as a contractor versus as an employee will enable you to reduce your earnings with business deductions, you will in return be subject to self-employment tax (social security and medicare) on this income. If you are an employee of a Mexican company, then you would not be subject social security and medicare taxes, but then again you won't be paying in social security or medicare taxes either.