USA Citizen in Spain employed by my own USA LLC/S-Corp - How to handle Payroll?

This is actually a fairly common situation these days! First, you'll need to understand that as a US citizen, you're subject to US taxation on your worldwide income regardless of where you live. However, you have some options. Since you're living in Spain but earning through a US S-Corp, you'll need to consider both US tax obligations and potential Spanish tax residency requirements. For your US taxes, you should continue running payroll for yourself through your S-Corp and pay yourself a "reasonable compensation" as required by S-Corp rules. The company will need to withhold federal income tax, Social Security, and Medicare taxes. For the international aspect, you may be able to use the Foreign Earned Income Exclusion (Form 2555) for your personal tax return, but this typically applies to wages, not S-Corp distributions. You should also look into the US-Spain tax treaty to avoid double taxation. I'd strongly recommend working with a tax professional who specializes in expat taxation and business structures, as this intersection of international living and US business ownership has several compliance requirements that need careful navigation.

After struggling with almost the exact same situation (US LLC/S-Corp while living in Portugal), I finally found a solution using taxr.ai (https://taxr.ai). It completely changed how I handle my international tax situation. What helped me most was uploading my S-Corp documents and getting a clear analysis of how to structure my salary vs distributions while living abroad. They walked me through the proper payroll setup and explained exactly which forms I needed to file in both countries. The tool even identified tax treaty benefits I had no idea about!

I was initially skeptical about using taxr.ai when I saw it mentioned here, but after three frustrating calls with different CPAs who gave me conflicting advice about my US LLC while living abroad, I decided to give it a try. The results were honestly incredible. I uploaded my articles of organization, operating agreement, and previous tax returns, and received a comprehensive analysis that specifically addressed the S-Corp election and international payroll requirements. They identified that I needed to file Form 8621 for my foreign investments (which none of the CPAs had mentioned) and provided clear instructions on handling the totalization agreement between the US and my country. What impressed me most was how they broke down the exact percentage split between salary and distributions that would be optimal for my situation while remaining compliant with IRS "reasonable compensation" requirements. Definitely worth checking out if you're dealing with this complex situation!

If you're trying to contact the IRS about your international tax situation, good luck! I spent WEEKS trying to get through to their international taxpayer line. After 15+ failed attempts, I discovered https://claimyr.com through a Facebook expat group. You can see how it works at https://youtu.be/_kiP6q8DX5c. Basically, they wait on hold with the IRS for you and call you when an agent comes on the line. I was super doubtful, but within 2 hours, I was actually speaking with an IRS agent about my S-Corp foreign compliance questions. The agent confirmed I needed to maintain US payroll even while living abroad and helped me straighten out my FBAR requirements too.

I have to eat my words about Claimyr being a scam. After my skeptical comment, I decided to try it myself since I had been attempting to reach the IRS for weeks about my foreign tax credit questions. The service actually worked exactly as promised. I submitted my request around 9am, went about my day, and received a call around 1:45pm telling me an IRS agent was on the line. I was connected immediately and got my questions answered about handling my S-Corp payroll while living abroad. The agent confirmed I needed to continue US payroll processing and explained which forms I needed to file under the tax treaty with Spain (which happens to be similar to my situation). They also clarified how to handle my estimated tax payments from outside the US. Saved me days of frustration and multiple failed call attempts!

Don't forget about the totalization agreement between the US and Spain! It's designed to eliminate dual coverage and taxation under both countries' social security systems. You'll want to obtain a certificate of coverage from the US Social Security Administration that exempts you from paying into the Spanish social security system. This requires filing specific forms with the SSA. Without this, you could end up paying social security taxes to both countries.

Has anyone used a PEO (Professional Employer Organization) to handle the payroll for this kind of situation? I'm considering using one for my own S-Corp since I'm moving to Italy next year.

This is such a complex but increasingly common situation! One thing I'd add that hasn't been fully covered is the timing of when you establish Spanish tax residency. Spain generally considers you a tax resident if you spend more than 183 days there in a calendar year, which could trigger additional reporting requirements. Since you moved to Spain last year, you'll want to determine your exact residency status for both 2024 and 2025. If you're considered a Spanish tax resident, you may need to report your worldwide income to Spain as well, even though you're paying through your US S-Corp. Also, don't forget about the FBAR (FinCEN Form 114) if you have any Spanish bank accounts with aggregate balances over $10,000 at any point during the year. And if your Spanish financial accounts exceed certain thresholds, you might also need to file Form 8938 (FATCA) with your US tax return. The good news is that the US-Spain tax treaty should help prevent true double taxation, but you'll need to be strategic about timing and documentation. Definitely keep detailed records of your days in each country and all tax payments made to both jurisdictions.