US Self Employment and Social Security Taxes for Expats Guide
All Americans are required to file US taxes reporting their worldwide income, even if they live abroad.
The IRS has provided a number of exemptions, notably the Foreign Earned Income Exclusion and the Foreign Tax Credit, that US expats can claim when they file that for most people mean they won’t end up paying any US income tax. Which exemption it’s best to claim depends on each expat’s circumstances, however it’s important to be aware that these exemptions don’t also cover social security taxes.
Self-Employment and Social Security Taxes for US Expats
While most Americans are only required to file a US tax return if their income is over $12,200 (in 2019), Americans with self-employment income are required to file and declare their worldwide income if it’s over just $400 a year.
Self-employed expats, as well as expats working for an American employer (and some expats working for a foreign employer if stipulated in a Totalization Agreement – more about these to follow), are required to pay social security taxes from abroad.
Self-employed Americans are required to pay US social security taxes on all their worldwide net self-employment income over $400.
“If you are living abroad and you are a self-employed U.S. citizen or resident you generally are subject to the self-employment tax.” – the IRS
Self-employed American expats are required to pay US social security taxes at a rate of 15.3%. This is made up of 12.4% social security tax, and 2.9% Medicare tax.
So a self-employed expat freelancer or Digital Nomad with an annual profit of $100,000 after business deductions for example could exclude all of their income from US income tax by claiming the Foreign Earned Income Exclusion when they file their federal return, but they would still be liable to pay $15,300 of US social security tax (potentially as well as social security taxes and income tax in their country of residence).
Expats who are registered as sole proprietors, or who have a US LLC but haven’t elected to have it taxed as a separate entity, are still liable to pay US social security taxes.
While any US income tax that self-employed expats may owe is due by April 15th (although expats have an automatic extension until June 15th to file their return), estimated social security taxes must be paid quarterly.
The US has treaties called Totalization Agreements with 26 other countries that are intended to prevent expats from paying social security taxes twice (i.e.to the US as well as in the country where they live.
The way these work is that they specify that if an American is living in the other country for a fairly short time before returning to the US, typically between two and five years as specified in each treaty, they will continue paying US social security taxes and not pay them in the foreign country.
If they plan to be abroad longer however, they will pay them just in the country where they live and not to the US. The contributions made to either country under the terms of the treaty count towards both countries’ state pension entitlement.
The 26 countries are: Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom.
Some self-employed expats may be able to reduce or eliminate their US social security tax liability by establishing an LLC, as once they are employed by the foreign LLC rather than self-employed they won’t be liable to pay US social security taxes. Whether this will be beneficial depends on each expat’s circumstances and income levels though, as the foreign LLC will raise new filing and possible taxation issues. It can still create an overall savings though.
Another factor to consider is that not paying US social security taxes may impact expats’ ability to claim social security payments in retirement.
FBARs and catching up
Another US filing requirement for many self-employed expats is reporting their foreign bank (and investment) accounts, including any business accounts they control even if the account isn’t in their name.Expats who are behind with their US tax filing because they weren’t aware of the requirement to file from abroad can often catch up under an IRS amnesty program called the Streamlined Procedure.