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.

This is exactly the situation I found myself in when I moved to Barcelona while running my US S-Corp! One thing that really helped me was understanding that you need to maintain "reasonable compensation" through payroll even while abroad - the IRS doesn't care where you physically are when determining S-Corp compliance. Here's what I learned through trial and error: You'll need to continue running US payroll for yourself, but you can potentially exclude that salary income using Form 2555 (Foreign Earned Income Exclusion) on your personal return if you meet the physical presence or bona fide residence tests. The tricky part is that this only applies to your salary, not any S-Corp distributions. For Spain specifically, once you become a Spanish tax resident (usually after 183 days), you'll need to report your worldwide income there too. But the US-Spain tax treaty has provisions to prevent double taxation - you'll likely use the foreign tax credit method rather than the exclusion for some income types. I'd also recommend getting familiar with Form 5471 if your S-Corp has any foreign subsidiaries or significant foreign activities, and definitely stay on top of your FBAR filings for any Spanish bank accounts. The penalties for missing these international forms can be brutal! Feel free to reach out if you need specifics about the Spanish side - I've been through this exact process and happy to share what worked for me.

One important aspect that hasn't been fully addressed is the Spanish tax implications once you establish residency there. Spain has a "Beckham Law" (Ley Beckham) that might be relevant to your situation - it allows new Spanish tax residents to pay tax only on Spanish-sourced income for up to 6 years, rather than on worldwide income. However, this special regime has specific requirements: you must not have been a Spanish tax resident in the 10 years prior to moving, your work must be performed in Spain, and you need to apply within 6 months of becoming a Spanish tax resident. If you qualify, this could significantly simplify your Spanish tax obligations while you're running your US S-Corp. Also, regarding your S-Corp distributions - these will likely be treated as dividends under Spanish tax law and may be subject to different rates than your salary income. Spain generally taxes dividend income at progressive rates (19-28% depending on the amount), but the US-Spain tax treaty should allow you to credit Spanish taxes paid against your US tax liability. Make sure you're aware of Spain's Modelo 720 reporting requirement if you have foreign assets (including your US bank accounts and S-Corp shares) exceeding €50,000. The penalties for non-compliance are severe, so it's crucial to stay on top of this reporting obligation. I'd strongly recommend consulting with a Spanish tax advisor who specializes in US expats to ensure you're taking advantage of all available benefits and meeting all compliance requirements.

One crucial aspect I haven't seen mentioned yet is the potential impact on your S-Corp election itself. The IRS has specific rules about S-Corp shareholders, and extended foreign residency can sometimes complicate things, especially if you end up becoming a non-resident alien for tax purposes (though as a US citizen, this is less likely). More importantly, you'll want to be very careful about how you document your work location for the IRS. Since you're physically in Spain but working for your US S-Corp, make sure you can clearly demonstrate that your business activities and decision-making are still US-based if questioned. This can help support your position that the S-Corp income is US-sourced rather than Spanish-sourced. Also, consider the timing of your S-Corp distributions carefully. Since Spain taxes dividend income progressively and you might be able to use the foreign tax credit, it could be beneficial to time larger distributions in years when your Spanish tax rate is lower or when you have other foreign tax credits available. One last tip: keep meticulous records of your physical presence in each country. This will be essential for both the Foreign Earned Income Exclusion calculations and for Spanish tax residency determinations. I use a simple spreadsheet tracking entry/exit dates, but there are also apps designed specifically for this purpose. The intersection of S-Corp taxation and international living is complex, but definitely manageable with proper planning and documentation!