All you need to teach online is a laptop and an internet connection. It’s not something that you need to be at home to do; it can be done from anywhere in the world! An online teacher may have the luxury of being able to travel around the world to exotic locations while having the freedom to choose their work schedule, and yet working as an independent contractor can get quite taxing when tax-filing time comes around. You have the opportunity to be able to save on taxes since you could work overseas in a low or no-tax jurisdiction instead of having to work from the US and having to pay federal and state income tax.
Being a teacher that resides overseas comes with pros and cons. With the exciting prospect of being able to make money while traveling, the pros can outweigh the cons. And with a little bit of planning, you’ll know how to mitigate taxes and correctly use tax deductions for online teachers. Before we get started, keep in mind that this article pertains to an online teacher who has been hired as an independent contractor and not as an employee.
Foreign Housing and Other Deductions for Online Teachers
While some online teachers have housing provided by their employers, others pay for their own housing. The foreign housing deduction applies only to amounts paid with self-employment earnings. Qualified foreign housing expenses include rent paid (not including refundable deposit), cost of furniture rental, and utilities such as water, electricity, and gas. It does not include Internet and telephone, foreign occupancy taxes, parking fees at your residence, etc. The costs to purchase a house or furniture are also not deductible under the foreign housing deductions for online teachers.
Note: if the foreign net self-employment income is completely excluded by the FEIE, you will not be able to claim the foreign housing deduction. And, although the foreign housing exclusion will reduce your regular income tax, it will not reduce your self-employment tax.
Foreign Tax Credit
As a US expat, you will be taxed on your self-employment earnings as a contractor in both your country of residence and in the US. To mitigate or avoid double taxation, you may claim a foreign tax credit to offset US tax on your foreign self-employment earnings. The foreign tax credit is usually beneficial in a high-tax country, where the tax rate for your net self-employment earnings is higher in your country of residence than in the US.
Foreign Earned Income Exclusion
For 2020, up to $107,600 of foreign earned salary income, or net business income earned as a contractor, can be excluded from taxable income on a US return. To qualify for the Foreign Earned Income Exclusion (FEIE) of $107,600, for tax year 2020, an expat should have resided overseas for at least 330 days in a 365-day period (not necessarily a calendar-year 365-day period). The foreign earned income exclusion is preferable in a low-tax country such as Hong Kong or Singapore, or a no-tax country such as the UAE.
Self-Employed Health Insurance Deductions for Online Teachers
Sometimes, an employer provides health insurance to the online teacher. In such cases where you end up paying for your own health insurance coverage in your country of residence, remember that the annual premiums paid can be claimed as an “above-the-line” deduction to lower your self employment tax. However, this deduction will not reduce your net self-employment income that is subject to the self-employment tax of 15.3% on your US tax return.
If you have to conduct classes via Skype, Zoom, or a phone call—or if you have an annual subscription to Skype, Zoom, or another platform—the expenses incurred for these subscriptions can be claimed as a business expense to offset contractor income earned from being an online teacher.
In the current environment, conducting business without a smartphone is nearly impossible. If you use your phone to conduct classes online, you can deduct the expenses that relate to the phone, such as paid applications that relate to your business, anti-virus software, etc. As a result, most of the expenses to maintain your smartphone are tax-deductible.
For example, if you bought a cell phone this year solely for your business, you can deduct the entire cost of the device as an offset to your gross contractor income for the tax return that is filed for the year of purchase of the phone.
Note: contractors who use one phone for both business and personal use will need to estimate which percentage of their usage is personal, and deduct personal usage from the total expense. If you use your phone for approximately six hours in a 24 hour-day for business purposes, you can apportion 25% of the total cost incurred to maintain the phone towards business expenses. Costs, including mobile plan subscriptions, phone insurance, etc., can be apportioned based on business usage of the phone. Use your best judgment to determine the percentage of business usage of a phone that is used for both business and personal usage.
It may be easier to purchase a separate phone for work purposes. If not, you will be required to log data and cellular usage that was specifically for your work to get an accurate rate for deductions for online teachers.
Laptops used solely for business purposes, i.e., for preparation of teaching materials and presentations, and laptops used to make calls for work, can be fully expensed in the year of purchase, including the cost of anti-virus software, operating system, and other software that is installed for official purposes. The cost of annual subscriptions to software such as “Grammarly” that is used for business purposes can be deducted in its entirety.
If laptops are used both for personal and business use, a similar method, such as the apportionment of phone expenses for personal and business usage, will need to be used. However, expenditures for software that is solely used for official purposes can be deducted in full. Again, use your best judgment to determine the percentage of business usage of a laptop that is used for both business and personal usage.
WiFi expenses should be reasonably apportioned for business use and personal use. For instance, if you use your home WiFi for work about 50% of the time, you would deduct 50% of your WiFi as a work expense from your tax filing.
Totalization agreements exist between the US and specific countries. By residing in a country where such an agreement exists, and by earning self-employment income, you will only be subject to social security tax in your country of residence. You will not have to pay self-employment tax at the rate of 15.3% with your US tax return. Importantly, you will need to obtain a “certificate of coverage” from the local social security administration, which needs to be attached with your US tax return for all years that you are claiming an exemption for paying US self-employment tax.
To avoid having to pay the underpayment penalty for estimated taxes, be sure to set aside 15.3% of your self-employment earnings towards estimated tax payments for self-employment tax. Estimated payments are due quarterly.
Estimated tax payments are due as follows:
1st payment: April 15
2nd payment: June 15
3rd payment: September 15
4th payment: January 15 of the following year