How does self-employment tax work for those Americans, who live abroad, travel the world and work for themselves? Well, you still have to pay US taxes on foreign income if you are a freelancer, independent contractor, digital nomad or entrepreneur abroad. Yes, US tax laws apply no matter where in the world you live and perform the work.
The self-employment tax is a social security and Medicare tax on net self-employment income. You must pay this tax if your net self-employment earnings are at least USD$400 in a year. But don’t panic, we know the ways to legally minimise tax burden for self-employed Americans abroad.
Contact us if you want to receive a free email consultation.
1. Filing requirements for Self-Employment Taxes
You fall under different filing threshold category if you are self-employed US person who reside abroad. As we mentioned earlier, earning USD$400 in a year already triggers a filing requirement for a tax return. As the US is one of the two countries which practice citizen-based taxation, it’s necessary to take care of US tax obligations even while living abroad. Who does the IRS consider to be self-employed? If you belong to any of the following categories:
- A member in a LLC, depending on how the LLC elects to be treated for tax purposes
- Independent contractor
- Sole proprietor
- Partner in a business partnership
- Freelancing etc.
The self-employment tax rate is 15.3% of net earnings up to a base amount. The base amounts are US$128,400 in 2018 and US$132,900 in 2019. The rate consists of 2 parts: 12.4% goes toward Social Security (old age, survivors and disability insurance) and 2.9% covers Medicare hospital insurance). That means the Social Security portion applies only to the first $128,400 of self-employment income (for 2018 tax year). And Medicare applies to any amount thereafter.
Additional Medicare tax: If you make more than base amount limits, the excess of wage limits will be taxed at 2.9%. Depending on your income, you might be also subject to Additional Medicare Tax (AMT). The current rate is 0.9% and it applies to individuals who earn above the certain threshold, based on filing status.
Self-employed Americans abroad have to pay AMT if they earn more than the following amounts: $250,000 for married filing jointly and $200,000 for single filers. While Medicare Tax doesn’t have limits, the certain amount of your income will be a subject to Social Security tax.
You do not take the Foreign Earned Income Exclusion into consideration when figuring net earnings.
2. What about Social Security tax for Americans residing abroad?
Americans abroad often need to pay Social Security tax regardless where they work and live.
While residing abroad, many US expats have to contribute to foreign country’s social insurance systems. It’s done to cover the benefits you might be receiving while living in a foreign place. This is where expats get taxed twice because they have to pay both US Social Security tax and to the current residence country.
To eliminate dual taxation of US citizens and GreenCard Holders living abroad, the US has Social Security Agreements with a number of countries. If you are employed by a foreign employer, including a foreign subsidiary of a US company, you won’t be subject to U.S. Social Security Tax in most cases.
Socia Security Totalization Agreements
While there are income tax treaties with a large number of countries, they do not cover Social Security taxation in two countries on the same income. Thus the US has separate Social Security Totalization Agreements with 29 countries:
- South and North America: Brazil, Chile, Uruguay, Canada
- Europe: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, United Kingdom
- Asia and Oceania: Australia, Japan, South Korea
Social Security Totalization Agreements (SSTA) with above mentioned countries help prevent double Social Security Taxation. In this case, you are only subject to the host country SS tax. However, in some cases when you were sent on a temporary assignment to one of these 29 countries, then you may qualify for an exception and pay FICA tax (Federal Insurance Contributions Act, the name of the law that created Social Security in the US) instead. The agreements indicate that if an individual is sent abroad on a contract or do not intend on staying overseas for more than 3 to 5 years, they will pay into social security of their home country.
Social Security tax fact: If you are working in a country that has a SSTA with the United States, then you are exempt from FICA tax. Generally, you can claim the foreign country’s social security tax as an addition to your foreign tax credit. But keep in mind that FTC offsets your U.S. regular income tax liability and not your FICA taxes.
3. How to reduce Self-employment Tax
Generally speaking, there are a few advantages for Americans abroad who are foreign employees over self-employed ones when it comes to US taxes. You may be subject to self-employment taxes if you are:
- A freelancer or independent contractor
- A sole proprietor
- A member of a general partnership
- A member of an LLC that is considered a disregarded entity for tax purposes
However, there are ways to minimise your tax burden triggered by self-employment tax laws. Can you avoid SE tax if you are self-employed working for a foreign company? There are a few ways to save money on your tax bill in a long-term.
LLCs vs S-corporation
LLCs: A limited liability company (LLC) is not a separate tax entity. As a consequence, with an LLC, the income passes through to the owner, who has to pay 15.3% self-employment tax. As the owner who resides abroad, you can use the Foreign Earned Income Exclusion to minimise income tax but not self-employment tax.
The IRS considers single-owner LLCs as sole proprietorships for tax purposes. So you need to report all profits or losses of the LLCs on Schedule C. And then you attach it to 1040 tax return. However, if you have profits in your company’s bank account at the end of the year, you will need to pay income tax on it.
Domestic LLCs are automatically considered to be disregarded entity. If you want same election for a foreign LLC, you will need to file Form 8832 once and then another Form 8858 every year. In cases, when you decided not to have your LLC disregarded, you must file Form 5471, which is a lot more complicated.
S-Corp: As we already know, the self-employment tax applies to earned income. If you form an S-Corporation and your clients pay not you directly but S-corp, then it’s not earned income to you – yet. But you still should pay your personal bills, correct? For that you would need earned income. You can do following: divide those payments and pay yourself a percentage as a “salary” and the balance as dividends. The “salary” portion will be subject to self-employment income as it is classified as “earned income”.
What happens to dividends? They aren’t taxed as self-employed income. Thus you have reduced your net earnings by whatever percentage you took as dividends.
Tax Tip to remember: There is a new Repatriation tax, which you may be subject to depending on the ownership in the company. It applies to US owners of foreign businesses.
4. Where to establish a foreign company?
If you are a nomad, moving from one country to another and you don’t stay there long enough to establish an official tax residency, then this strategy might work for you. You can employ yourself in a foreign corporation. We recommend to establish one in a country with tax advantages and low operating costs. You can have a foreign corporation, which owns a US LLC and you use the latter one to sell your products. It depends on your particular business needs.
This option might cost a few thousands dollars to set up correctly and maintain it. But there is a possibility it will be cheaper than paying self-employment tax on your foreign income. Caribbean islands and particularly Belize is easy country to incorporate and bank with no income tax. However, they lack prestige of other popular jurisdictions. Hong Kong is a popular place to establish a company but it’s getting harder with FATCA regulations. HK doesn’t impose tax on those with no HK income, but you have to qualify for this exception. A country of Georgia is also one of the options with their foreign-friendly jurisdiction.
If you decide to form a company in more reputable countries, i.e. the United Kingdom or Estonia, you probably won’t need an LLC. While these countries have a corporate income tax (around 20%), that only applies to corporate net profits. You can pay yourself nearly all the income of the business as a salary. In this case the corporate profit will be quite a small amount.
However, the strategies we mentioned above apply to businesses where you offer services. US has a concept, which bans directing the income to another person than the one who performs the services. Since a corporation is a separate legal person, running the income through it won’t be in accordance with US tax law.
5. Deductions for ordinary and necessary expenses
One of the ways to save money on your tax bill is to take advantage of business expenses. We have already learnt that Foreign Earned Income Exclusion can lower your income tax liability. But what about other available deductions? The IRS allows you to deduct the expenses which should be both ordinary and necessary.
Ordinary expenses are the ones which are commonly used and accepted by your business industry standards. For example, the expenses such are typical and needed for your trade to run the business. However, ordinary expenses should also be necessary in order to deduct them from your business taxes.
Necessary expenses are the ones which considered to be helpful and appropriate in running your business. Again, you cannot deduct necessary expenses if they are not ordinary expenses also.
Does it all sound too complicated for you? Well, here are a few examples of business expenses you can take advantage of: advertising, supplies, rental of office space and equipment, taxes and licenses etc. You will need to use Schedule C to deduct these expenses. You will also need to pay SE tax before you can apply FEIE or FTC.
Summary of Self-employment tax for Americans living abroad
Being an US entrepreneur or freelancer living abroad is a rewarding experience. Hoping that the IRS will not find out about your foreign self-employment income is a bad idea in general. The IRS will impose heave fines if they catch you under-reporting self-employment income or not reporting it at all. Do you know that they can go back as many years as they want? Even past the 7 year statute of limitations.
While we described a few ways to reduce your Self-employment tax liability, it’s extremely important to seek professional tax advice before you proceed with any of the above-mentioned strategies. There are some issues to consider beyond taxes and we strongly recommend to consult tax professionals.
At 1040 Abroad we have tax experts, who help Americans abroad to minimise their tax burden on daily basis. Contact us now and schedule a free consultation to discuss the best solutions available for you.
I’m a US expat working as an independent contractor for a UK company and operate simply as a sole trader when I file my UK tax self assessment tax.
Am I only required to file form 8858 if I set up as an LLC/Ltd while working abroad for US tax purposes?
Hi Gigi! If you set up an LLC/ltd in the UK, it will be treated as a foreign corporation triggering an additional filing requirement of a complicated form 5471 (We charge $500 for this form alone). If you’re sole trader you can report your income on Schedule C.
Hi I’m from the US but I spent most of 2019 in Thailand. I work remotely for an American ESL company. My Tax Expert from H&R Block claims I’m not eligible for the CTC because my daughter spent less than 6 months in the US. Is this true? Am I ineligible for the credit because of the amount of time spent outside the US?
Hi Lavonatae! Yes, nevertheless there is the additional child tax credit that you are eligible to claim. You cannot use the FEIE to lower your taxable income. You can only use the foreign tax credit to offset your US tax liability and claim the ACTC.
Hi Olivier, i’m a freelancer living in France, one of the countries with the Social Security Totalization Agreements. My business is pure service, and I do all my work from France. Do I still need to pay US self-employment tax? I already pay them in France.
Thanks, N
Hi N! No, you don’t need to pay the SE tax because France has signed the totalization agreement.
thanks so much for your response 🙂
Hi N! Happy to help.
Hi Olivier, I have the same situation as N above, but living and working completely in Switzerland. In TurboTax though it seems to suggest that I need to declare all income and expenses itemized and that I still have some Federal tax to pay? (Although I am below the threshold and have never previously had to pay).
Hi D! You should contact TurboTax support as we use different software.
Hello there, I have a trade license/business license allowing me to freelance in the Czech Republic. I’ve had it for the tax year of octover 2019 to dec 2019. I’ve made under 5000 usd. What forms do I need to file to the Irs?
Hi Tyler! The federal tax return is form 1040.
The trade liscence is for the CZ not America, is 1040 the only form I need to file?
Thanks for the info Oliver! Navigating these waters is quite the challenge!
Hi Tyler! The additional forms you might need to file depend on your situation. It might not be the best idea to discuss this publicly. If you need assistance, don’t hesitate to contact us.
Hello,
IF I make 30000 as a contractor with a US company but live in Greece, will I be taxed with the 15.3% on the 30.000? I know that I would also have to pay a remaining tax percent in Greece as I am also a Greek citizen.
Thank you
Hi Margarita! No, the US has signed a totalization agreement with Greece. If you pay income taxes in Greece, you won’t be subject to self-employment tax in the US.
Hi, I’m a freelance English teacher in Morocco, trying to navigate Turbo Tax without declaring my income twice–once under Foreign Earned Income Exclusion and another time as Self-Employed. I made under $17k in 2019–even though self-employed, does this not fall below some bracket for Foreign Earned Income? Or do I still have to pay self-employment taxes? Thank you!
Hi Andrew! Yes, you are still subject to self-employment tax of 15.3% as Morocco has not signed a totalization agreement with the US.
Hi,
I’m a freelancer living and working in Spain, where I pay social security. The IRS website says this: “To establish that your self-employment income is subject only to foreign social security taxes and is exempt from U.S. self-employment tax, request a certificate of coverage from the appropriate agency of the foreign country.”
Would I have to get this document translated to English before sending it to the IRS? Do you know if Spain can provide documents in English?
Hi Zach! Yes, it would include an English translation. With that being said, if you enter a Spanish address on your 1040, the IRS doesn’t typically request the certificate of coverage.
Hello! I have a b&b in Germany. I make around 20-30 k a year but generally only have 10k or so in profit. Do i need to pay SE tax?
Hi Teresa! No, Germany has signed a totalization agreement with the US to avoid double taxation. You won’t be subject to SE tax.
Hi Oliver! I’m an American Citizen and living in Portugal as a bonafide resident. I understand that there is a totalization agreement between the countries so that I don’t have to pay self employment tax in the US since I am enrolled in the Portuguese social security system. Do I need to include any sort of proof or documents along with my tax filing?
Hi Max! No, you don’t any additional documentation to be filed together with your tax return.
Hi Olivier
I live and work in Switzerland as a freelancer. Do I have to file 1040-SE or 1040 as Switzerland has an agreement with the US? I pay income taxes in Switzerland
Hi Florian! You still have to file a US tax return 1040 even if you live in a country that signed a totalization agreement with the US.
Is this the case even if you earn below the earnings threshold for filing? i.e. it is more than the $400 SE threshold but less than $12,500 and you live in a country with a totalization agreement?
Hi Angie! No, if you have self-employment income, your filing threshold is $400.
Greetings I am a US citizen who is a permanent resident of Canada and I started my sole proprietor company in Canada. On the form 8854 it asked for a reference number and I do not have. I was never given one, is that something that I need to get from the US IRS since I have a company or FB foreign branch in Canada?
Hi Stephanie! A reference number is a string of characters (letters or numbers) that you chose the first-time you file form 5471 and that you then use consistently for that corporation, you would then report it on form 8854, but you would have chosen that string of characters the first time you filed a form on which it was requested.
Hey Olivier,
I’m a US citizen living in Israel and recently I started working freelance for an Israeli company. Do I need to pay the self-employment tax in the US, even if I make less than $100k?
Hi Kasha! Yes, you will be subject to the US self-employment tax as there is no totalization agreement between the US and Israel.
Hi. If I have opened an LDA in Mozambique and am a resident. I’m hired through the company that I opened and pay both income tax and social security abroad am I still required to pay the self employment tax?
Hi DP! No, you won’t be subject to the SE tax, but you have to file 5471 to report the company.
Hi Olivier!
I am a dual US & Norwegian citizen. I am self employed and operate my business as a s-corp in the United States. I am moving to Norway this summer and plan to continue working as self-employed. Is it okay to keep my s-corp in the United States or should I move my company to Norway? My clients are all US based. I am very confused on the best way for me to pay taxes in the next phase of my life while living in Norway.
Hi Kristen! If you’re operating as an LLC, which elected to be treated as an S-Corp, the simplest way would be to revoke that election and operate as a single-member LLC (and therefore be a disregarded entity). You wouldn’t be liable for social security in the US and would instead have to pay it in Norway as per the Social Security totalization agreement between the US and Norway. Feel free to use the contact form on this website in order to discuss it further.
Hi Oliver,
I work as a freelancer for US companies and receive payments for my services in US bank but I live and work from Bulgaria for the past year and a half or so. I’m not registered with the Bulgarian IRS. Which country do I pay taxes to, US or Bulgaria? Can I claim Foreign Earned Income on my 1040 and if so do I need to pay income tax in Bulgaria under their law?
Thanks a lot,
Hi Sammy! Yes, you are subject to Bulgarian tax. You can use the FEIE to exclude your foreign earned income.
Hello, I am a US citizen living in Canada on a temporary open work permit (will likely upgrade to permanent residence next year).
I originally came here to study (I completed my program 3 years ago) and then I obtained an open work permit and worked the same job that got me through university until I was able to live full time on self employment income alone (about a year now). I work entirely for myself making art supplies.
I did my Canadian taxes a few months ago and im pretty sure I paid into some kind of social program similar to SS, is there any way for me to avoid paying into American SS now that I am preparing to file my USA taxes?
Thanks
Hi RD!
Canada has signed a totalization agreement with the US which means if you pay into the Canadian SS system, you don’t have pay into the US SS system.
does self-employment or opening a business to become an individual entrepreneur (and becoming a tax resident of my country of residence) exclude me from taxes in the USA? referring to the tax treaty with the USSR.
Hi HJ! A US citizen would always have to file a tax return, and if self-employed would pay self-employment tax (unless there is a totalization agreement with the US, which there isn’t with former USSR countries).
Hi! I am a U.S. Citizen, living and working in Italy (with unlimited VISA) for an Italian company. I worked for this company 2 years now and always paid taxes in Italy.
Every year I still file my U.S. taxes with the FEIE and end up owing 0$ and getting 0$.
Now I found a job as a freelancer with a company in Redmond (WA) and they will give me a 1099-MISC for the money I earn with them.
I still want to keep my job with the Italian company as well though.
When I file taxes next year, do I have to pay SE tax?
If yes, how much will that be in % (roughly)?
And do I have to pay it just on the 1099-MISC income or also on the money that I earn from the Italian company (which I already pay taxes for, here in Italy).
Thank you very much in advance!
Hi Sherif! No, Italy has signed a totalization agreement with the US.
Hi Olivier, I am US and Turkish Citizen and planning to move to Turkey and open an online clothing store (e-commerce) under Sole Prop or LLC. Store will be selling mainly to USA. Should I register the business in USA or Turkey. Which model is best and which is better with the taxes? and If I choose to register my business in USA, do I have to pay taxes to Turkish government since I wont be registering anything in Turkey. Thank you so much!
Hi Mesut! I would use a Turkish corporation in order to avoid US income tax (foreign tax credit, or foreign earned income exclusion) and US self-employment tax. Feel free to use the contact form to schedule a call with me in order to discuss it further.
Hello, I am a US citizen and a permanent German resident.
I am employed fulltime, but operate a consulting business on the side.
Do I pay SE tax on the freelance income?
Do I file this separately on the FEIE?
Thank you.
Hi XZ! Germany has signed a totalization agreement with the US. If you pay SE tax in Germany, you are not liable for the SE tax in the US.
Hi Olivier,
Thank you for the informative post (better than most out there). Regarding section 3 LLCs, since my 100% owned foreign LLC (Taiwan) is considered a foreign corporation by default (I read this elsewhere), I don’t have applicable SE taxes, right? However, it sounds like form 5471 has to be filed under Category 4 for me?
Cheers
Hi HM! Yes, you must file form 5471.
I live and work in France, in two capacities. In the past, all my income has qualified for the FEIE. If I start an entrepreneur status, how will I report both incomes and will I lose the benefit of the FEIE for that portion of the income?
Hi NH! No, you can still use the FEIE.
Hi, not sure if you can help me find answer to my question, but let’s try..
I have dual citizenship American & Polish. I am employed by NY corporation that does business in US only. I am moving to Poland for some time. Can I continue to be employed by my company and work remotely from Europe?
Hi MK! Yes, you can.
Hi Olivier, I’m a US citizen and permanent resident in the UK. I am getting ready to launch my natural skincare brand here in the UK which is an LLC. I am the majority owner and my husband, who is British holds a small percentage in my company. I know I am still subject to income tax but where do I fall in as far a employment tax? Will I have to pay dual taxes in the UK and USA?
Hi Mimi! Most likely you won’t be subject to US tax, but you must file. UK LLC will trigger an additional filing requirement of a complicated form 5471. We charge $500 for the form alone.
Hello, I am a partner in a small business in Israel. My partner and I are both US citizens. I receive a paycheck and pay all Israeli taxes and social security. Do I need to also pay social security in America on my earned income? what about any profit that is taken from the business?
Thank you
Hi Joshua! No, employees of a foreign employer, working outside the US, are not subject to US social security.
Greetings Olivier!
I am from US but live in Ukraine and work for a Swiss online English company. It’s my first year filing like this. We are classified as consultants for the European company, so it appears I would be subject to the self-employment tax. I do have an LLC in the US that I started, but it’s not actively earning income yet. I’ll make about $14,000 this year so apparently need to pay 15.3% on these wages but unsure. Also have Estonia e-residency card so thought about setting up an online teaching/consulting company through that so I can start my own focused teaching company. It’s incredibly confusing and I just learned here that what I thought was mistaken. I was of the understanding I could make up to $12,500 and not be concerned about even filing, and then the Foreign Income Exclusion would cover me until I got to $107,600 but apparently it doesn’t cover freelancers who make over $400. Ugh. Maybe I should call and talk to someone to prepare for my new life abroad and get strategy on how to move forward? Thanks
Hi Aaron! Yes, I would recommend speaking to a tax professional. You will be subject to the self-employment tax and your filing threshold is $400. Setting up a foreign corporation would eliminate the self-employment tax but it would trigger additional filing requirement of a complicated form 5471. We charge $500 for the form alone.