US Taxes for Freelancers & Independent Contractors Working Abroad
- Do US Contractors Abroad Pay US Taxes?
- Self-Employment Taxes for Freelancers & Contractors Abroad
- Does a Client’s or Employer’s Location Affect Where You Pay Taxes?
- Can Contractors Living Abroad Claim the Foreign Earned Income Exclusion?
- Other Tax Deductions for Contractors Working Abroad
- Common Tax Forms for Freelancers & Contractors Living Overseas
- Still Have Questions About US Taxes for Contractors Overseas? We Can Help!
Working as a freelancer or Independent contractor can provide the freedom and autonomy many expats crave. But what are US taxes like for contractors overseas? Let’s find out.
- Freelancers and Independent contractors must file a US tax return even when working overseas.
- The IRS provides a variety of tax benefits for Americans living abroad.
- Using these expat tax benefits, many overseas contractors can reduce their US tax bill significantly.
Do US Independent Contractors Abroad Pay US Taxes?
Every US citizen is required to file a tax return if they meet their minimum filing threshold. That threshold will vary based on the filing status of Americans who receive employment income. However, if you receive self-employment income, the threshold is always $400. Any year that you make at least $400 in self-employment income, you must file a tax return to report it—regardless of where you live in the world.
The good news is that the IRS provides several tax benefits for Americans living abroad. By using these benefits, you may be able to erase your US income tax bill entirely. But in most cases, you will still have to pay the 15.3% self-employment tax. This means that virtually all expat freelancers and contractors must file a US tax return.
If you expect to owe $1,000 or more when filing your annual return, the IRS requires you to submit estimated quarterly payments or be subject to potential penalties. To find out what you have to pay—and tips on how to estimate your tax bill—check out our guide on estimated taxes.
Self-Employment Taxes for Freelancers & Independent Contractors Abroad
Under US tax law, self-employed Americans must pay a self-employment tax. This tax is designed to replace the Social Security and Medicare taxes that are usually withheld from an employee’s salary.
In the standard employer-employee relationship, both parties must contribute 7.65% of the employee’s salary to the US Social Security and Medicare systems. This comes to a total of 15.3% (7.65% x 2 = 15.3%). Self-Employed individuals are considered by the IRS to be both the employer and an employee and therefore have to pay the complete 15.3% themselves.
High earners may also be subject to the Additional Medicare Tax. This tax applies once your self-employment income exceeds the threshold for your filing status.
- If you are single, the threshold is $200,000 in annual income.
- If you are married and filing jointly, the threshold is $250,000 in annual income.
- If you are married but filing separately, the threshold is $125,000 in annual income.
Once you exceed the threshold for your category, you must contribute a further 0.9% of your self-employment income to the Medicare system. Combined with the standard 15.3% self-employment tax, your total contributions would be 16.2%.
Does a Client’s or Employer’s Location Affect Where You Pay Taxes?
It might. As a US person, you must file a US tax return reporting your worldwide income. However, your income source could impact who you owe your taxes to. For example, if you are a resident of a foreign country and your client or employer is also located in that country, that country normally has the first right to tax your income unless there is a US tax treaty that allows for different treatment. If there is no tax treaty in place, you normally have the option to claim the foreign tax credit to reduce or eliminate any US tax owed on this income.
The rules of international taxation can be incredibly complex. Consult a qualified expat tax professional service like Greenback to learn the details of your unique situation.
Can Independent Contractors Living Abroad Claim the Foreign Earned Income Exclusion?
One of the best ways to lower your US taxes is through the Foreign Earned Income Exclusion (FEIE). The FEIE lets qualifying expats exclude a certain sum of foreign income from US taxation—the exclusion amount changes from year to year. For 2022, the FEIE limit was $112,000. In 2023, the limit has increased to $120,000.
To claim the FEIE, you must pass one of two residency tests:
- Physical Presence Test requires that you are physically present outside of the US for 330 days out of any 365-day period.
- Bona Fide Residence Test requires you to reside in a foreign country for at least an entire calendar year without intending to return to the US.
There is one critical issue that determines if income is foreign earned, and that is where you are physically when you are working. Other things, such as where your client is based, if your pay is received in a US bank account, and if you are paid in US dollars, do not matter. For example, if you live and work only in France, all that income is foreign-earned income. If you are living in Brazil, but go to the US to work for 2 weeks each year, then two weeks of income is US-earned income with the rest being foreign-earned income.
The FEIE also only shields you from the US income tax. It does not apply to the self-employment tax. Even if you were able to exclude your entire income from US taxation using the FEIE, you would still have to pay the 15.3% self-employment tax on that income.
Fortunately, the FEIE is not your only option for expat tax savings. There are a variety of other tax benefits you can claim to optimize your tax bill further.
Other Tax Deductions for Independent Contractors Working Abroad
Self-employed expats can claim many of the same deductions as a business owner based in the US. For example, as an expat freelancer, you can deduct qualifying expenses for:
- Business equipment
- Office supplies
- Office space (including a home office)
- Health insurance
- Legal and professional services
Foreign Tax Credit
The Foreign Tax Credit lets you subtract foreign taxes from your US tax bill. For example, if you owe $20,000 in US taxes but paid $15,000 to a foreign country, the Foreign Tax Credit would allow you to reduce your US tax bill to $5,000 ($20,000 – $15,000 = $5,000). This credit is designed to protect Americans from double taxation while living abroad. Unfortunately, like the FEIE, the Foreign Tax Credit does not apply to self-employment tax.
Foreign Housing Deduction
Self-employed expats can use the Foreign Housing Deduction to deduct certain foreign housing-related expenses from US taxation. This deduction can be used regardless of whether you rent or own your home.
The US has signed tax treaties with more than 60 countries around the world. These treaties clarify which country has the right to tax a given stream of income, helping Americans avoid double taxation while living overseas. If you are a resident of a country with a US tax treaty, you can claim your rights by filing Form 8833.
Totalization agreements are similar to tax treaties—but applied to Social Security taxes. As a self-employed expat, a totalization agreement would protect you from having to pay the self-employment tax to multiple countries. The US currently has totalization agreements in place with 30 countries.
Common Tax Forms for Freelancers & Independent Contractors Living Overseas
IRS Form 1040: Individual Income Tax Return
Form 1040 is the standard US individual income tax return. This is the form you will use to report your income regardless of where you live. For most US citizens, Form 1040 is due on April 15 every year but for expats, that deadline is automatically extended to June 15th.
You can request an additional filing extension to October 16 for Form 1040.
IRS Form 8938: Statement of Specified Foreign Financial Assets (FATCA)
If you own non-US financial assets valued above a certain threshold, you must file a FATCA report. Your threshold will depend on your filing status and whether you live inside or outside the US. If you do have to file a FATCA report, attach it to your Form 1040 and file both at the same time.
FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR)
If you have the equivalent of $10,000 deposited in one or more non-US bank accounts, you must report it by filing a Foreign Bank Account Report (FBAR). This is not an IRS form. Instead, it’s issued by the Financial Crimes Enforcement Network (FinCEN). However, that doesn’t mean you should take it lightly. Failing to file an FBAR when required can result in severe penalties.
The FBAR is technically due on April 15 every year, but if you miss that deadline, don’t panic. The deadline will automatically extend to October 15th.
Still Have Questions About US Taxes for Independent Contractors Overseas? We Can Help!
At Greenback Expat Tax Services, we help Americans around the world manage their US tax obligations. Our team of expat-expert CPAs and IRS Enrolled Agents is standing by to answer your questions about US Taxes for Freelancers & Independent Contractors Working Abroad. 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.