How Self-Employment Affects Your US Expatriate Taxes

Considering self-employment while living abroad? You’re not alone – the flexibility such a career move provides is ideal for a US expat! While working for yourself, as an independent contractor or owning a business seems like an ideal situation, you should be aware of the implications it creates for your expatriate taxes to ensure it’s the best decision for you. Fortunately, the IRS has guidelines in place to help you understand your obligations as a self-employed expat – read on for more details.

1. Income

Something that often surprises US citizens is the fact they must file a US Tax Return if they earn a mere $400 in self-employment income. So, even if you are doing a small side job out of your home that doesn’t generate much income, chances are, you’ll still be required to file expatriate taxes.

While the US is one of few countries that requires you to file expatriate taxes on your worldwide income, fortunately, it does have provisions in place to help protect you from double taxation, such as:

Foreign Earned Income Exclusion: Allows you to exclude the first $101,300 of your 2016 foreign income ($102,100 in 2017) on your expat tax return – learn more about this exclusion in this article.

Foreign Tax Credit: Allows you to lower your tax bill on the remaining income by certain amounts you paid to a foreign government – you can read more about this credit here.

Foreign Housing Exclusion: Allows for an additional exclusion on certain amounts paid for household expenses while living abroad – get more details in this article.

There are a few caveats to this, as we’ll elaborate on in the self-employment tax section below.

2. Self-Employment Tax

When you work for an employer and receive a W2, your employer takes out their portion of taxes for Social Security and Medicare and your portion will be deducted from your paycheck before you receive it. However, when you’re self-employed, it’s your responsibility to pay both the employer and employee portions of this tax.

For 2017, the total amount you’ll need to pay is 15.3% of your gross income, broken down by Social Security tax of 12.4% on the first $127,200 of income and Medicare tax of 2.9% on all earnings.

It’s important to note that this tax must be paid out before you can take advantage of the Foreign Earned Income Exclusion or Foreign Tax Credit (which are outlined above). So, indeed, you’ll want to take advantage of these tax savings, but just ensure you’ve already paid your 15.3% Social Security and Medicare tax before applying the credit or exclusion.

3. Additional Forms

You should be prepared to file some additional paperwork with your expatriate taxes as self-employed expats will need to file a Schedule C (Profit or Loss from Business) or Schedule C-EZ (Net Profit from Business).

If you own your own business, there may also be other forms like Form 5471 that you will need to file. You can find more business tax tips here.

4. Estimated Tax

Generally, many self-employed expats will need to make estimated tax payments to the IRS since you’re earning income that isn’t subject to withholding. It’s important that you make these quarterly payments if required for your situation, as you may otherwise be subject to a penalty when filing your expatriate taxes. You could also be subject to a penalty for underpayment of your estimated tax obligations, so it’s always a good idea to consult a tax professional to ensure you are paying enough.

Self-employment is great for the US expat lifestyle, so long as you take the necessary steps to prepare for filing your US tax abroad. For more tax tips and deadline information, download our tax guide for Americans working overseas.

Need Help Filing Your Taxes as a Self-Employed Expat?

Our team of expat-expert CPAs and IRS Enrolled Agents are here to help you with all of your expatriate tax needs – get started with us today and cross taxes off your to-do list ahead of the June deadline!

Free Guide: The 25 Things Every Expat Needs to Know About Taxes

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