Self-Employment Tax Deductions and Credits for US Expats

When you embark on the adventure of living abroad, you open yourself up to exciting experiences, diverse cultures, and tantalizing cuisines. However, if you’ve decided to pursue a side gig or fully embrace self-employment during your overseas journey, navigating your tax obligations becomes a bit more intricate.

As a self-employed expat, understanding your income, tax liabilities, and the deductions and credits available is crucial. In this comprehensive article, we dig into everything you need to know about self-employment taxes. Additionally, we’ve prepared a convenient cheat sheet on self-employment tax deductions to assist you in maximizing your tax benefits.

What are self-employment taxes?

As the name implies, self-employment taxes are only paid by self-employed people. And they include both Social Security and Medicare taxes.

That said, whether you’re liable for self-employment tax will also depend on how your business is set up and taxed. 

Let’s take a look at a few business structures available to small business owners.

• Sole Proprietorship, Limited Liability Company, Partnership: The IRS considers these business owners self-employed for tax purposes. Accordingly, the business’s net income is subject to self-employment taxes.
• S-Corporation: As an ‘S-corp’ owner, you’ll pay self-employment tax on the business income you designate as your salary. However, income received as distributions does not attract any self-employment tax.
• C-Corporation: The salary you receive as a shareholder of a C-corp is not subject to self-employment tax because the IRS considers you an employee.

Current US tax law provides exemptions from self-employment tax for certain types of business income. These include rents, dividends, retirement income, and investment earnings.

Self-employment tax is not the only tax that business owners pay. As a US expat, you are also liable to pay income tax at the state and federal levels. However, being liable to pay taxes doesn’t mean you’ll necessarily pay taxes – especially if you understand how expat taxes work or partner with an expert.

Do Americans pay taxes on businesses owned abroad?

Americans must pay taxes on businesses owned abroad because the US tax system is based on citizenship and is not dependent on where you live or work. 

That said, even if you’re abroad, the filing threshold for self-employment tax remains $400. The $400 threshold refers to net earnings: total income earned less IRS-permitted deductions.

To calculate self-employment tax, you’ll file Form 1040, Schedule SE.¹

2023 Social Security and Medicare tax rate

As the header alludes, self-employment tax has two components: 

• Social Security, and 
• Medicare. 

In total, these taxes amount to 15.3%. Take a look at the detailed breakdown between Social Security and Medicare below.

Self-Employment Tax Rates, 2023²

Tax type	Tax rate
Social Security	12.4%
Medicare	2.9%
Total	15.3%

When you’re an employee, these taxes are equally split between the employer and employee. Consequently, the employee will part with 6.2% for Social Security tax and 1.45% for Medicare tax.

But the self-employed are responsible for the entire 15.3% since there is no difference between them and their business for tax purposes. 

Thankfully, there is a limit to how much Social Security tax you’ll pay. 

Unfortunately, Medicare tax is not capped. You will pay 2.9% of your net earnings, whether your income is $90,000 or $300,000.

There is some good news! Generally, you can deduct the employer portion (7.65%) of your self-employment tax to calculate your adjusted gross income, which will help lower your income tax bill. 

However, proceed with caution: There’s also the Additional Medicare tax of 0.9% if your self-employment earnings are more than:

• $250,000 for married filing jointly, 
• $125,000 for married filing separately, and
• $200,000 for all other taxpayers, including single filers.⁴

Self-employment tax deductions cheat sheet for US expats

Self-employed expats can subtract IRS-approved business deductions from their gross income to determine the net earnings amount subject to self-employment tax. 

And while the IRS continuously revises most of these provisions, the following cheat sheet can 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.5
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.

Other considerations for expat small business owners

The IRS has tax perks available for expats to avoid double taxation, including the:

• Foreign Earned Income Exclusion, and
• Foreign Tax Credit.

Foreign Earned Income Exclusion

In 2023, the Foreign Earned Income Exclusion (FEIE) allows you to exclude up to $120,000 of foreign income from US income taxes.

Unfortunately, though, the FEIE doesn’t allow you to avoid self-employment tax. Your foreign self-employment income will still be subject to self-employment tax.

Foreign Tax Credit

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.

References

1. 1040-Schedule SE
2. Self-employment tax rates
3. Social Security wage limit 2023
4. Additional Medicare tax
5. Home office expense deduction