Expat Self-Employment Tax

For Sole Proprietors and Independent Contractors

Could You Owe Expat Self-Employment Tax?

What are you doing abroad? Are you just traveling and seeing the sights, or are you earning a living? If you’re traveling or living in retirement abroad, there is no need to declare foreign self-employment income. If you work for yourself as a freelancer, independent contractor or sole proprietor — either full-time or part-time — while living in another country, and you meet the tax filing threshold, you are required to file U.S. self-employment tax on your foreign income. 

Need help? Let the CPAs at Expat CPA come to your rescue! Find out whether you earn enough income to meet the threshold for self-employment tax for U.S. citizens abroad and the penalties of not paying self-employment tax.

Who Owes U.S. Self-Employment Tax on Foreign Income?

The U.S. government determines who owes self-employment tax on income earned while living abroad. Presently, the government requires that you file a U.S. income tax return if you had $400 or more of net earnings from self-employment, regardless of your age. You must pay self-employment tax on your self-employment income even if it is excludable as foreign earned income in figuring your income tax.

Net earnings from self-employment include the income earned both in a foreign country and in the United States. If the money was earned partially in the U.S. and partially in another country, you’ll still need to pay a self-employment tax on foreign earned income.

While there are exemptions for those who make a living overseas, most notably the foreign earned income exclusion policy, self-employment income is treated differently. You’ll still need to pay self-employment tax on income earned as a self-employed individual. 

If you are self-employed, you will still be able to exclude foreign earned income from your overall income tax, but there is no version of a foreign earned income exclusion self-employed income. This means you’ll pay self-employment taxes on all the income you earned while freelancing or as a sole proprietor — even if you are able to exclude a portion of that income under income tax exemptions for expats. 

The reason you need to pay self-employment taxes on the entirety of your net income is that these taxes fund your Social Security and Medicare. Since you are essentially the employer and the employee, the government reasons, you should pay the taxes owed on the full net income. It can be frustrating at the moment, but understanding that the measure is ultimately going to help you may ease the pain.

Self-employed individuals must make quarterly tax payments to meet their self-employed tax threshold by year’s end. Failure to make adequate quarterly payments can lead to a fine, which increases the amount of money you owe. 

While there is a seven-year statute of limitations on taxes, that does not apply to situations where the IRS suspects a sole proprietor of under-reporting income. If you don’t pay self-employment taxes or declare income, the IRS can legally go back as far as it wants to determine whether you’ve met your taxable obligations. You could be heavily fined for under-reporting income.

Get Help Paying Self-Employment Tax U.S. Citizens Abroad

Our professionals understand who must file a self-employment tax form, how to report foreign self-employment income, how to fill out the tax form correctly and how to set up quarterly payments — so you avoid tax penalties. We also offer tax consulting services, so you can learn how to maximize your tax situation — and minimize your tax debt — by forming a business plan and paying the minimum necessary taxes on self-employed income earned while living abroad.

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