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Globally-minded US entrepreneurs, location-independent contractors overseas, and freelancers abroad are trailblazers with unique tax needs: To understand how to file taxes for self-employed expats.
Before any self-employment taxes (sometimes referred to as “SE tax“) are filed though, you’ll want to ensure that your global US tax strategy is maximum efficient. To accomplish this, you’ll need to understand your various options for business entity structures, your annual filing requirements under the US’s citizenship-based taxation model, ways to save on your personal & business taxes, and more.
In the following article, we break down what self-employment taxes for US expats look like and elaborate on the importance of establishing and following a cross-border tax plan.
A brief overview: Self-employed and independent contractor statuses
Self-employed individuals embody the term, “Be your own boss.” They typically get to work the hours they choose and decide what they work on.
Independent contractors normally work longer term and predominantly with one company or client. In many cases, independent contractors, like consultants, provide expertise or services rather than specific products.
What is foreign-earned income?
Foreign earned income is income received for work carried out or services provided when a US citizen or Green Card holder is physically abroad.
It doesn’t matter whether the income is business income (such as if you’re a sole proprietor), earned as an employed individual, whether it is paid into accounts in the US or abroad, or the currency transacted.
The US taxes all US citizens (and Green Card Holders) on their worldwide income. This method of taxation follows the principles of citizenship-based taxation. So, a US expat’s foreign income is generally considered taxable by the US.
How to file your tax return overseas with self-employment income
The threshold for filing an annual US tax return is much lower for self-employed expats than it is for earners of other income types. If you earn just $400 of self-employment earnings during a calendar year you must file a US tax return.
Income is classified as US or foreign by where it is earned, according to the IRS. So if you are living and working abroad, your income is considered foreign-earned income. This is the case even if:
- a US company or client is paying you
- income is paid into a US account
- earnings are in USD.
It is a self-employed person’s responsibility to submit quarterly estimated payments to the IRS based on their projected annual income. This differs from a W2 employee, where the employer withholds tax from their earnings.
Self-employment taxes
The total rate of self-employment tax for the 2024 tax year is 15.3% on the first $168,600. For the 2023 tax year, this amount was $160,200.
This accounts for Social Security and Medicare payments, which are broken out as follows:
| Tax Type | Self-Employment Tax Rate |
|---|---|
| Social Security | 12.4% |
| Medicare | 2.9% |
| Total | 15.3% |
Use Schedule SE (Form 1040) to calculate the tax due on net earnings from self-employment. The Social Security Administration also uses the information from Schedule SE to calculate your credits. This, in turn, drives future benefits under the Social Security program.
Is foreign income subject to self-employment tax?
When calculating self-employment tax on net earnings, all global income is taken into account, regardless of where it was sourced. This applies even if you plan to use IRS tax provisions. Common ones include the Foreign Earned Income Exclusion or Foreign Tax Credit to offset your US tax liability. Unfortunately, neither of these provisions reduces your self-employment tax due.
📢 An exception to paying US self-employment tax exists.
If a US expat lives and pays foreign social security taxes in a country with which the US has signed a treaty called a Totalization Agreement, they can claim an exemption from paying double social security tax. This is done by filing a statement with their tax return. More on Totalization Agreements below!
How to report foreign self-employment income
The main self-employment tax form is Schedule C (Form 1040). This form reports income earned as a self-employed taxpayer either through a sole proprietorship or single-member LLC.
In other words, you should use Schedule C to record your company’s (or your own) earnings and expenses.
Self-employment tax deductions cheat sheet for US expats
Self-employed expats can subtract ordinary and necessary business deductions from their gross income to determine the net earnings amount subject to self-employment tax.
The IRS continuously revises most of these provisions. The following cheat sheet can serve as a starting point to help you determine eligibility for various tax deductions.
| Expense type | Helpful notes on the related IRS deduction |
|---|---|
| Home office | Operating your business from your home allows you to deduct certain property-related expenses, such as rent and utilities, based on the square footage of your home office as a percentage of the overall home square footage. |
| Assets, such as equipment | Since assets should be capitalized and depreciated based on the cost and the asset type, the IRS generally does not allow immediate deductions for assets. |
| Advertising, branding, and promotional activities | The IRS allows deductions of most marketing-related expenses. |
| Vehicle | You can use the standard mileage expense deduction or actual expenses when using your personal vehicle for business use. |
| Insurance | The IRS will generally allow a deduction if a policy is in the name of the business. |
| Legal and professional fees | The IRS generally permits deductions of legal and professional costs, including those associated with obtaining tax advice. |
Of note: In certain countries, you are required to register your business abroad, which could affect the IRS deductions and credits you’re eligible for. We get into this more below!
How to file estimated payments for self-employed expats
Self-employment income is not subject to withholding. This means that business owners should proactively pay taxes every quarter, estimating the amount they will owe throughout the year. You can use IRS form 1040-ES to calculate your estimated tax payments.
It’s important to note that you should exercise diligence in making these quarterly payments. Failing to do so (or underpaying) can result in penalties. If you have doubts about how to file estimated payments for self-employed expats, a US expat tax professional can assist.
Totalization Agreements
The country in which you reside plays a big role in determining where you pay your self-employment taxes. For example, imagine you are a US citizen living full-time in France and making your living as a freelancer. In this case, you might create a French business entity and be required to pay Social Security and healthcare taxes to the French state. Every year, however, the US will try to collect Social Security and Medicare taxes from you, based on your freelancer status. This is where the Totalization Agreement comes in.
What is a Totalization Agreement?
A Totalization Agreement is a treaty signed between the US and another country that prevents double taxation concerning social security taxes, including self-employment income. Twenty-four countries have Totalization Agreements with the US. If you reside in one of these countries and have already made contributions to their social security system, the Totalization Agreement may determine that you are exempt from paying US self-employment/social security taxes.
Important callout:
If you pay into the social security system of a country that does not have a Totalization Agreement with the US, then you will have to pay US Social Security & Medicare taxes as a self-employed individual. It's important to be both aware of preexisting totalization agreements and abreast of any pending agreement changes in the works. For example, in 2023 the Totalization Agreement between the US and Hungary expired and was intentionally not renewed, leaving US citizens in Hungary and Hungarians in the US more double tax-vulnerable.
Key US expat tax forms
Below are just a few of the important provisions and filing requirements that self-employed US Expats with a trade or business should be aware of.
Foreign Tax Credit (FTC)
Thanks to the Foreign Tax Credit, you can claim a dollar-for-dollar tax credit for foreign income taxes you’ve accrued or paid. It cannot be used to offset self-employment taxes, however.
The Foreign Earned Income Exclusion (FEIE)
The FEIE is a common expat tax provision allowing qualifying expats to offset up to $120,000 in tax year 2023 (filing year 2024) from their US tax return. This amount is indexed annually for inflation, and the provision is best used when the US taxpayer is living in a country with lower tax rates than the US, or is extremely mobile.
The Foreign Bank Account Report (FBAR)
The Foreign Bank Account Report (FBAR) is a key component of self-employment tax for expats. If you have $10,000 or more in your foreign bank accounts (combined) at any time during a given year, you will need to file an FBAR report. Missing this step is another common mistake that could create exposure to an unforgiving penalty.
Catching up if you’re behind
Building a business abroad is no small feat, and time can fly. If you’ve fallen behind on your US tax obligations while building your dream, you may be able to catch up penalty-free via an amnesty program. This program is called the Streamlined Procedure.
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