If you are an investor, self-employed, or earn more than the FEIE, there may be requirements to pay estimated tax for US citizens living abroad. This depends on what they do for a living and the types of income they receive.
You may need to pay estimated taxes if you are a US expat and one of the following situations describes you:
- You are an investor
- You are self-employed, and you pay US Social Security taxes
- You are an employee who spends time working in the US
- Your foreign self-employment income and/or foreign wages exceed the Foreign Earned Income Exclusion (FEIE, which is $95,100 per person for 2012).
These are common situations for US expats who pay estimated taxes. However, not every expat who is described in this list has to pay estimates. For instance, many US expats who earn more than the FEIE have enough foreign tax credit to cover their US taxes. But if you are described on this list, you would be wise to take a closer look at your estimated tax payment requirements.
How US Expats Can Make Estimated Tax Payments
Estimated tax payments are made throughout the year and are applied to your current year tax. Due dates for estimates are April 15, June 17, September 16, 2013, and January 15 of the following year. The same US estimated tax rules that apply to taxpayers living in the US apply to you. If you expect to owe $1,000 or more with your US tax return, you should pay quarterly estimates in order to avoid a penalty. (Estimated payments can reduce the penalty for underpayment of estimated tax. Other penalties may still apply.)
Payments can be mailed to the IRS with 1040-ES payment vouchers, or you can pay electronically through the EFTPS system. You can use EFTPS to pay any of your US income taxes. To enroll, go to the EFTPS website and complete the brief online registration process.
Calculating Estimated Taxes for US Expats
One way to determine whether you should pay estimated taxes is by last year’s US tax return. If you owed $1,000 or more with last year’s US tax return, and your situation has not changed, then you should make estimated payments to the IRS for this year’s US tax.
The amount you should pay is the amount you owed on last year’s tax return. Divide that by 4 to calculate this year’s quarterly estimated payments. If you expect anything to change, you should change your current year estimates accordingly. For instance, if you had US withholding of $800 last year and expect no US withholding this year, you should increase your estimated tax payments by a total of $800, or $200 each quarter.
If your US tax situation has changed, you will have to do some tax planning and estimating to determine your estimated tax requirements. If the only US taxes you expect to pay are Social Security taxes on your self-employment income, you will have to estimate your “net profit” first.
Your net profit is your gross self-employment income minus your deductible business expenses. Deductible business expenses are those items that are “ordinary and necessary” for your business and often include travel, office supplies, dues and subscriptions, conferences and seminars, and just about anything else that is “ordinary and necessary” for your business. The tax deduction for meals and entertainment is limited to 50% of what you spend.
After you have calculated your estimated net profit, you can calculate your SE tax (Social Security taxes on self-employment income) by multiplying your net profit by the SE tax rate, which is 13.3% for 2012. If that amount is $1,000 or more, and you expect to owe no other US income taxes, your SE tax is your total estimated tax. Divide your SE tax by 4 to determine your quarterly estimated tax payments.
Have Questions About Estimated US Expat Taxes?
If you are an investor or you worked in the US or your earnings are more than the FEIE, then you should calculate your estimated US taxable income, US tax and US foreign tax credit to determine whether you should pay estimated taxes. Have a look at our Small Business / Entrepreneur Expat Tax Resources to learn more about these filing requirements. If you need help with these calculations, please contact us for more information.