One of the great things about being an expat is the opportunity to see parts of the world you might not have visited before. Thus, having flexibility to travel is very important to most US expats – and the best way to have this luxury is to be self-employed, so you can work around your own schedule. Self-employment brings with it several tax implications that you should be aware of before beginning your adventure abroad while working for yourself. Here’s the expat tax advice you need to know!
The Ins and Outs of Self-Employment Taxes
Self-employment means you work for yourself, but there are several different ways you can earn this title, including as an independent contractor or becoming an entrepreneur and owning your own business. For expat tax advice purposes, self-employment income includes pay that you receive for part-time or full-time work that you do, inside or outside your home. You could receive self-employment income even while working for a company as a W2 employee.
The main difference between being self-employed and being a W2 employee is how you file your taxes. Unlike a W2 employee, you are fully responsible for withholding taxes from your pay – they won’t be automatically taken out prior to payday. Generally, you will have to pay self-employment tax, which includes Social Security and Medicare taxes, in addition to income tax. To determine this tax, you’ll want to use Schedule SE, Self-Employment Tax. You’ll need to make estimated tax payments, which makes you pay taxes on income that isn’t subject to withholding. Expat tax advice tip: making estimated payments can prevent you from having to pay a penalty when you file your taxes, since the IRS can penalize you for not paying enough taxes during the year.
When it comes to filing your taxes, you’ll use Schedule C, Profit or Loss from Business or Schedule C-EZ, Net Profit from Business, along with your Form 1040-NR. Fortunately, as a self-employed individual, you’ll be able to take advantage of some deductions that are only available to those who work for themselves. Read on for details.
Tax Deductions for Self-Employed Expats
In order to qualify for deductions on your taxes, you must use part of your home or apartment for business purposes and meet the following two criteria:
- Regular and Exclusive Use – A certain area of your home must be exclusively used for business
- Principal Place of Business – Your home or apartment must be the primary place where business is conducted
If you aren’t a small business owner or an entrepreneur, but work out of your home as an employee, you may also qualify for a home-office deduction.
Types of Expenses That Are Deductible
The expenses you’re able to deduct are categorized based on direct, indirect and unrelated expenses. Direct expenses, which are those used for your business, can be deducted in full. Indirect expenses, those required to maintain your home, like utilities and repairs, can be deducted based on the percentage of your home that is used for business.
Some expenses may include:
- Mortgage interest
- Mortgage insurance premium
- Real estate taxes
- Casualty losses
- Other expenses, like utilities, depreciation, etc.
You can find more details on specific expenses you can deduct on the IRS website in Publication 587.
Note that your deductions must be considered ordinary and necessary. An ordinary expense is one that’s common and accepted in your industry, and a necessary expense is one that is helpful and appropriate for your trade or business.
Generally speaking, there are advantages of being self-employed when it comes to living abroad and filing expat taxes. A few pieces of expat tax advice regarding self-employment: you will likely experience lower tax rates, an untouched client base depending on your line of work, and reduced competition from other businesses and individuals. When it comes to your taxes, talking to an expat tax professional is recommended since you must understand the ins and outs of expat taxation as well as self-employment taxes!
Need Help With Your Taxes as a Self-Employed Expat?
Greenback can help! Our team of expat-expert CPAs and IRS Enrolled Agents are here for you – we can help you navigate the complicated nature of expat taxes as a self-employed individual. Get started with us today!