When Would You Have to Pay Self-Employment Tax While Working Overseas? 

The United States imposes taxes on its citizens on income that is earned not just within the country but also around the world. As a result, if you operate a business or work independently in a foreign country, you may be unfamiliar with whether you are required to pay self-employment taxes. Our accountant for self-employed U.S. expats knows how to help you calculate your self-employment tax liability. At U.S. Tax Help, we pride ourselves in offering our clients tax and accounting services that will ease their concerns when they are dealing with a complex income tax return. Ted Kleinman, CPA, explains when an expat would have to pay self-employment taxes while working overseas. 

Requirements for Filing Self-Employment Taxes While Working Overseas 

When you planned to relocate to a foreign country, you may not have expected that you would still be subject to taxes in the United States. Learning this news too late could mean that you would have to deal with an unexpected tax bill that could seriously affect your finances. Self-employment taxes are one matter where you should be sure to handle if you decide to operate your own business after moving overseas. 

Self-employment taxes are collected on net earnings for the purpose of funding social security and Medicare. If a person were employed by a company in the United States, these taxes would typically be automatically taken out of their paycheck. Self-employed workers would have to extract these taxes from their checks manually, and they are required to do the same when operating a business overseas. 

The self-employment tax rate is determined by combining the social security tax of 12.4% and the Medicare tax of 2.9% to get a total of 15.3%. In 2020, a taxpayer must pay that 15.3% on the first $137,000 of the taxpayer’s wages, tips, and other sources of income. Now, in 2021, inflation increased the amount taxed up to $142,800. 

The full amount of a taxpayer’s earnings is subject to the 2.9% owed for the Medicare portion of the self-employment tax. 

Contact our tax preparation CPAs in order to confirm whether you have met the requirements for filing self-employment taxes as an expat. 

Claiming Foreign Earned Income Exclusion 

The foreign earned income exclusion (FEIE) could allow taxpayers living and working outside the United States to exclude a portion of their taxable foreign income. The IRS defines foreign income as wages, a salary, or other compensation that is paid to you for services that you provided. However, not all payments should be attributed as foreign income. For example, money received for military service or money earned working in international waters is not foreign income. 

If you want to claim the FEIE, you must have a tax home in a foreign country, and you must meet one of the following qualifications: 

  • The taxpayer is a U.S. citizen that is a bona fide resident in a foreign country uninterrupted for an entire tax year 
  • U.S. resident alien that is also a citizen of a foreign country the U.S. has a tax treaty with and who is a bona fide resident of a foreign country 
  • A citizen of the U.S. or a resident alien that is present in a foreign country for a minimum of 330 days in the calendar year 

Upon meeting one of the above requirements, you will be able to for the FEIE exception. This means that you will be able to exclude foreign income up to $108,700. Call an accountant for U.S. expat tax return preparation to discuss these matters further. 

When Does an Expat Need to Pay to Self-Employment Taxes? 

If you are unsure whether you need to pay self-employment taxes, the Internal Revenue Service (IRS) provides guidance on when a person is subject to these taxes. The IRS states that a person is required to pay self-employment taxes if one of the following is true: 

  • The taxpayer’s net earnings from being self-employed are at least $400 
  • The taxpayer was a church employee that earned at least $108.28 

In order to report your earnings from self-employment, you will likely need to use Schedule SE. Alternatively, if you operate as a sole proprietor or independent contractor, you will typically use Schedule C. 

Note that self-employment taxes are usually paid as quarterly payments. If you were not aware of this information, you may have missed one or multiple payments. Contact our experienced accountants for U.S. expat federal tax return preparation. 

If you do not file your taxes on time as an expat, you could be subject to a number of penalties. However, tax penalties are not the only reason that you should make sure that you file your tax return. For example, if you do not manage to file your tax return, the IRS may file a substitute return that will not consider any tax credits or deductions you could claim. 

Additionally, handling a number of tax issues from overseas could be especially difficult for an expat. 

We Could Help You File Your Self-Employment Taxes While Working Overseas 

If you believe that you are subject to self-employment taxes for your foreign business, you should contact an experienced tax planning CPA today. Ted Kleinman of U.S. Tax Help has accumulated over 30 years of work experience in matters of international tax regulations, and he is available to work with you. If you want to make a consultation to talk about your self-employment tax burdens, call (541) 362-9127 today. Online scheduling is also an option if needed.