How are U.S. taxes calculated for a foreign sole proprietorship owned by an American?
A foreign sole proprietorship is a disregarded entity for U.S. tax purposes, meaning you report all business income and expenses directly on Schedule C of your personal Form 1040. You owe U.S. income tax on the net profit and 15.3% self-employment tax unless a totalization agreement exempts you.
The calculation flow:
- Gross receipts from all clients and sales (in U.S. dollars)
- Minus ordinary and necessary business expenses
- Equals net profit on Schedule C
- Net profit times 92.35% equals net earnings from self-employment
- Net earnings times 15.3% equals self-employment tax
- Net profit flows to Form 1040, reduced by half the SE tax (adjustment to income)
- Apply FEIE or FTC to reduce U.S. income tax (but not SE tax)
What counts as business income:
- Service fees, consulting revenue, freelance payments
- Product sales net of cost of goods sold
- Royalties from self-created intellectual property
Required filings for foreign sole proprietors:
- Schedule C (net profit and expense detail)
- Schedule SE (self-employment tax)
- Form 2555 if claiming FEIE, or Form 1116 if claiming FTC
- Form 8938 if foreign financial assets cross the threshold
- FBAR (FinCEN 114) if foreign business accounts exceed $10,000 aggregate
- Form 1040-ES quarterly estimated payments if the total tax owed will exceed $1,000
Currency conversion uses the IRS’s yearly average rate or a consistent monthly average. Document your method and apply it consistently year over year.
For more on structuring and filing as a sole proprietor abroad, see our self-employed expat tax guide.
Last updated on April 29, 2026
