One of the benefits of being self-employed or an independent contractor is that you are in control of your entire operation. You are in charge of your routine and have the freedom to create something truly unique. While the upsides to self-employment are numerous, some drawbacks exist as well. Being self-employed creates a wrinkle in the already complicated process of expat taxes. Below, we’ve addressed the issues that are critical for self-employed individuals to avoid overpayment on their expat self-employment taxes.
Reporting Requirements & How Self-Employment Tax Works
Taking your operations across the globe can reap big rewards but can present some challenges. One of these challenges is determining what your US tax reporting requirements are regarding your foreign sourced self-employment income. As a US citizen or resident, you are required to file a US income tax return to report your worldwide income – even if you have not lived in the USA for many years or if you have no US sourced income – provided that your worldwide income is above a certain threshold for filing.
According to the IRS, the threshold for filing as a self-employed individual is $400 (a much lower threshold than for a wage/salary employee). This is due in part to the fact that self-employed individuals are required to pay self-employment taxes in additional to any US income taxes on their self-employment income. These self-employment taxes can be paid either by making estimated tax payments or with your personal US income tax.
Track & Deduct Expenses to Reduce Your Taxes
To help lower your US income tax liability related to your self-employment income, you are allowed to deduct expenses that are considered both ordinary and necessary in the generation of this self-employment income. These expenses can include:
- Cost of Goods Sold
- Home Office Expenses
- Business Use of Equipment and Vehicles
For more information on deductible business expenses, visit IRS – Deductible Business Expenses.
Tax Deductions for Self-Employed Expats
To help mitigate the burden of double taxation (paying income taxes in both your host country and the USA) on your foreign sourced income (including self-employment income), the US tax code includes the following provisions:
Foreign Earned Income Exclusion (FEIE)
The FEIE allows you to exclude the first $105,900 of your 2019 foreign earned self-employment income ($107,600 for 2020) on your US income tax return.
Foreign Tax Credit
The Foreign Tax Credit allows you to take a credit on your US income tax return for certain foreign income taxes paid to a foreign government on your self-employment income. For more information, click here.
Although the FEIE and Foreign Tax Credit help to lessen the burden of paying US income taxes on your foreign sourced self-employment income, they do not affect your employment tax obligation related to your foreign self-employment income.
To help mitigate employment taxes for self-employed individuals working in certain foreign countries, the US has entered into an agreement called a Totalization Agreement with several nations for the purpose of avoiding double taxation of income with respect to employment taxes (e.g., Social Security or Medicare taxes).
To be able to claim this employment tax exemption, the self-employed individual must include a statement (a Certificate of Coverage from the Social Security agency in the country of foreign residence), which indicates that employment taxes are being paid in the country of foreign residence.
Need Help with Your US Expat Self-Employment Taxes?
The Greenback expat tax experts are standing by and ready to answer the questions you have. Contact us today to find out how we can help you through the process!