Reporting Foreign Self-Employment Income: A Tax Guide for Americans Abroad
- What Are Self-Employment Taxes?
- Do I Need to Pay Self-Employment Taxes While Working Abroad?
- How to Report Foreign Earned Self-Employment Income
- How to Reduce Your Self-Employment Tax Liability: Deductions & Credits
- Does Your Business Structure Impact Your Self-Employment Taxes?
- Get Help With Your Foreign Self-Employment Taxes
The life of an entrepreneur comes with plenty of perks—but also plenty of complications. This is especially true for self-employed expats, who may have additional tax reporting requirements.
The good news is that you can pursue your dream career while still maintaining a reasonable tax bill. In this guide, we’re going to talk about how to report foreign self-employment income and what taxes you can expect to pay as a self-employed expat.
- Expat entrepreneurs are required to pay self-employment taxes just like any other self-employed citizen.
- The IRS provides certain tax benefits that Americans living and working abroad can use to reduce their tax bill.
- The structure you choose for your business will impact how your foreign earned self-employment income is taxed.
What Are Self-Employment Taxes?
Self-employment taxes generally refer to any tax on the income of a self-employed individual, such as a business owner or freelancer. However, it is also a specific tax that all self-employed Americans must pay.
The self-employment tax is designed to replace the Social Security and Medicare taxes that would typically be imposed on an employer-employee relationship. The required contribution for each employee is 12.4% of their income to Social Security and 2.9% to Medicare. This comes to a total of 15.3%, which is split evenly between the employee and employer, with each paying half.
As a self-employed American, the IRS views you as both employer and employee. This means you must pay the full 15.3% yourself. That is the self-employment tax.
If you are a high earner, you could also be subject to the Additional Medicare Tax. The income threshold for this depends on your filing status.
- For self-employed expats who are single, the threshold is $200,000 in annual income.
- For self-employed expats who are married and filing jointly, the threshold is $250,000 in annual income.
- For self-employed expats who are married and filing separately, the threshold is $125,000 in annual income.
The rate for the Additional Medicare Tax is 0.9%.
Do I Need to Pay Self-Employment Taxes While Working Abroad?
All US citizens are required to file a US tax return every year if they meet certain income thresholds. This applies regardless of where you live, and the thresholds are the same for Americans living in the US or abroad.
For self-employed expats, the filing threshold is $400. If you’ve earned at least $400 in self-employment income in a single year, you must report it to the IRS. This is done by filing Form 1040, Schedule C.
And just like an entrepreneur based in the US, the income you report will be subject to the US income tax as well as the 15.3% self-employment tax mentioned above.
If you expect to owe $1,000 or more when filing your annual return, should make estimated quarterly payments to the IRS to avoid potential penalties. (Typically, these estimated payments are withheld by an employer when paying their staff. Because you are self-employed, you are responsible for estimating and submitting those payments yourself.)
How to Report Foreign Earned Self-Employment Income
Reporting your income while living abroad requires careful attention and compliance with IRS regulations. Here’s how to report your foreign self-employment income:
- Maintain accurate records of income and expenses related to your self-employment activities.
- Determine if you meet the $400 threshold to report your self-employment income on a US tax return.
- Complete Form 1040, Schedule C to report self-employment income, expenses, and deductions.
- Calculate and report self-employment tax liability on Schedule SE at a rate of 15.3%.
- Check for any opportunities to reduce your tax bill through deductions, credits, and other expat tax benefits.
- Attach the appropriate schedules to your tax return and file them together.
- If you expect to owe at least $1,000 in taxes when filing your return, plan to submit estimated quarterly tax payments as required by US law.
By following these steps, you can meet your reporting obligations, minimize tax liability, and optimize your tax situation as a self-employed expat. However, reporting foreign-earned self-employment income can get complicated fast. We always recommend seeking guidance from a qualified tax professional who specializes in expat self-employment taxes.
How to Reduce Your Self-Employment Tax Liability: Deductions & Credits
Unfortunately, there is no magic bullet to erase your US tax obligations when working abroad. However, the IRS does have options in place to help expat entrepreneurs reduce how much they have to pay. These options include:
- Business deductions
- Tax treaty benefits
- Totalization agreements
- Foreign Earned Income Exclusion
- Foreign Tax Credit
- Foreign Housing Deduction
Using these tax benefits, many self-employed expats are able to drastically reduce their US tax bill.
Does Your Business Structure Impact Your Self-Employment Taxes?
Yes. The type of business you set up can have a major impact on your self-employment taxes. Let’s look at a few of the most common choices.
1. US LLC
A US-based limited liability company (LLC) is automatically considered a disregarded entity. This means that it is ignored for tax purposes. Any income the LLC earns is considered income you earn and it must be reported on your individual tax return and taxed accordingly. The self-employment tax will also apply. However, you can elect to have your LLC taxed as an alternate structure, such as an S corporation.
2. Foreign LLC
What about a foreign LLC? Unlike a US LLC, an LLC established under the laws of a foreign country is not automatically treated as a disregarded entity for US tax purposes. It might be considered a corporation. If it is considered a corporation, you can elect to have it treated as a disregarded entity unless it is a “per se” corporation. Specific types of business entities from specific countries that are per se corporations are listed in the instructions for form 8833. There is no election that can be made to have per se corporations treated as anything other than corporations.
If you conduct your business through a foreign LLC, your salary paid by the foreign LLC would not be subject to US self-employment tax. This income can also be excluded from US taxation using the Foreign Earned Income Exclusion.
However, establishing a foreign LLC can create new complications. Any time a company is created and registered outside the US, additional forms need to be filed with the IRS each year. Not doing so when required could easily result in penalties that start at $10,000 per year and can quickly increase.
3. S Corporation
An S corporation is treated as if it were a separate entity from the owner, but does not pay taxes. The owner of the S corporation will have two types of taxable income: salary and distributions. Any income regarded as salary is subject to the self-employment tax, with half paid by the S corporation itself and half by the owner receiving that salary. Any income regarded as distribution is exempt from the self-employment tax.
While this would make it tempting to maximize your distribution income to avoid the self-employment tax, the IRS requires that you draw a “reasonable compensation” in the form of salary. If you take too much income as distributions, the IRS may take issue. Furthermore, while S corporation salary income is eligible for the Foreign Earned Income Exclusion, distributions are not.
Get Help With Your Foreign Self-Employment Taxes
We hope this post has helped you understand how to report your foreign self-employment income and how you can optimize your US taxes. Still have questions about your foreign self-employment taxes? We have the answers.
If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.