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Many expats wonder what to do when they are contracting for a foreign employer and won’t be receiving any of the familiar forms: 1099s, W2s, etc. So our experts have compiled the answers to how to report foreign income without a W2, and where to report the income that comes from contracting for a foreign employer on the US return.
Anyone that falls into the category of US citizen, resident alien, or nonresident alien who works abroad for a foreign employer is typically not required to do any Social Security or Medicare tax withholding. But let’s say that instead you work for an American employer with a foreign affiliate. In that case, the employer may ask for Social Security and Medicare tax to be withheld from the employees of the foreign affiliate.
US citizens, resident aliens, and nonresident aliens who are employed in the US but work for a foreign employer are also still subject to Social Security and Medicare tax withholding as well. However, those who are employed in the US for a foreign employer might find they are exempt from Social Security and Medicare tax withholding if a totalization agreement is in place.
Totalization agreements are agreements made between two countries that define to which country certain taxes should be paid, including Social Security and Medicare tax – all in observance of foreign employer tax requirements.
When a nonresident alien receives wages from a foreign person for services they performed in the US, those wages are considered effectively connected with the conduct of a trade or business in the US, and you are considered an independent contractor for a foreign company. So, those wages are categorized as effectively connected income (ECI). That means the wages are subject to the US graduated tax rates and the income tax withholding (federal) as well as reporting by the foreign employer.
If a taxpayer earns a salary or wages as an employee in the US employed by an overseas employer, the earned income has to be reported on a US income tax return. Keep in mind that this income has to be reported irrespective of whether the employer provides a W2 or not. If someone working for a foreign employer is paid as an independent contractor, the income has to be reported on Schedule C of the US individual income tax return. And, expenses incurred in connection with the income earned will reduce the taxable income.
In addition to income tax, the net income (after deduction of expenses) is also subject to self-employment tax. A state tax return may also be a tax-filing requirement, depending on the state of residency.
Greenback experts specialize in taxes for Americans working abroad, so they’re familiar with the tax nuances of various employment scenarios, including expats who are contracting for an overseas employer. Get started today!