When Exactly is an Expat Subject to Self-Employment Tax on Foreign Income?

Under the U.S. Tax Code and Federal Insurance Contributions Act (FICA), employers are generally responsible for withholding employment taxes called “FICA taxes” from employee compensation. These FICA taxes include the Medicare tax, which is currently set at a rate of 1.45%, and the Social Security tax, which is currently 6.2%. If an individual is self-employed, he or she is responsible for paying a similar tax, aptly named the “Self-Employment (SE) Tax,” which effectively takes the place of FICA taxes. While this requirement may seem straightforward, questions often arise when the self-employed individual lives or earns income abroad. If you are self-employed with foreign income, you may owe self-employment taxes to the Internal Revenue Service (IRS). An experienced tax lawyer for expats can help you make sense of your tax responsibilities as a citizen living abroad.

Does the Self-Employment Tax Apply to U.S. Citizens Living Abroad?

The short answer to this question is yes, provided certain criteria are met. Though this will come to many as an unwelcome surprise, the SE Tax generally applies regardless of whether you reside within or outside the United States. That means you may be required to pay U.S. self-employment taxes even if you have relocated to Mexico, Singapore, Switzerland, or any other nation. The IRS is exceedingly clear on this point, stating in one publication, “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.”

This requirement stems from the fact that the United States taxes its citizens on global income rather than physical residence. This unusual tax system, known as “citizen-based taxation” (CBT), is utilized by only two nations worldwide: The United States, and the East African country of Eritrea.

While CBT may seem stringent or unfair, compliance is essential to avoiding penalties. To that end, it is imperative to educate yourself on IRS self-employment tax rules for citizens abroad.

Who Does the IRS Consider to Be Self-Employed?

The IRS generally considers you to be self-employed if any of the following statements are true:

  • You are a member in a limited liability company (LLC), depending on how the LLC elects to be treated for tax purposes.
  • You are a partner in a business partnership.
  • You are a sole proprietor (you operate a sole proprietorship).
  • You are an independent contractor.
  • You are “otherwise in business for yourself” (such as freelancing).

If you belong in any of these categories, you will typically be required to file and pay self-employment taxes, provided one of the following statements is true:

  • Your self-employment income met or exceeded $400 for the tax year.
  • You had church employee earnings of at least $108.28.

Self-Employment Tax Rates (Medicare, Social Security)

The self-employment tax rate has remained almost constant in recent years, with exceptions for 2011 and 2012, which were impacted by the 2010 Tax Relief Act. Self-employment tax rates by year, beginning in 2011, are indicated below.

  • Income earned in 2011 or 2012 – 13.3% (Medicare 2.9%, Social Security 10.4%)
  • Income earned from 2013-2017 – 15.3% (Medicare 2.9%, Social Security 12.4%)

With exceptions for 2011 and 2012, the Social Security tax rate has remained fixed at 12.4% since 1990, while the 2.9% Medicare tax rate has been in place since 1986. However, depending on your income, you may also be subject to the more recent Additional Medicare Tax (AMT), which is currently set at a rate of 0.9%. The AMT applies to self-employed individuals who earn more than the following amounts, based on filing status:

  • Single – $200,000
  • Married Filing Separately – $125,000
  • Married Filing Jointly – $250,000
  • Head of Household – $200,000
  • Qualifying Widow(er) with Dependent Child – $200,000

Only a portion of your income is subject to self-employment taxes. The exact size of this portion depends on the calendar year, with some recent examples listed below.

  • 2010 and 2011 – The first $106,800 of net earnings, tips, and wages
  • 2012 – $110,100
  • 2013 – $113,700
  • 2014 – $117,000
  • 2015 – $118,500
  • 2016 – $118,500
  • 2017 – $127,200

Notice the significant jump from 2016, when the first $118,500 of combined tips, wages, and net earnings were subject to the SE tax, to 2017, when that figure climbed to $127,200: an increase of nearly $9,000.

How Do You File Self-Employment Taxes?

Other than your federal income tax return, or Form 1040, you may also need the following documents to determine your net earnings and report your income from self-employment. These forms should be attached to your federal tax return as necessary.

  • Form 1040-SS (U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico))
  • Schedule C (Profit or Loss from Business (Sole Proprietorship))
  • Schedule C-EZ (Net Profit from Business (Sole Proprietorship))
  • Schedule SE (Self-Employment Tax)

Note that there are “Long” and “Short” versions of Schedule SE. An international tax attorney can make a determination about which version is most appropriate for your filing needs.

An experienced tax attorney can also help determine whether you are impacted by any of the United States’ Totalization Agreements, which can protect taxpayers against double-taxation by “ensuring that you pay social security taxes to only one country.” Countries with which the U.S. has entered Totalization Agreements include Australia, France, Germany, Luxembourg, Sweden, and the United Kingdom. You can view the full list online through the IRS.

International Tax Lawyer for U.S. Expats and Citizens Abroad

For most taxpayers, the deadline to file a federal income tax return is midnight of Tuesday, April 17, 2018, which is also the deadline for paying the IRS your estimated first-quarter self-employment income. (The next deadline, for second-quarter payments, is coming up Friday, June 15.) However, several tax extensions for citizens living abroad are available. For instance, you may obtain an automatic two-month (60-day) extension by attaching a written statement to your tax return.

If you have unresolved self-employment tax questions, the time to act is immediately, whether you live in the U.S. or abroad. For a reduced-rate tax consultation with an experienced employment tax attorney, contact the Tax Law Office of David W. Klasing online, or call (800) 681-1295 today.

Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San BernardinoSanta BarbaraPanorama City, and Oxnard! You can find information on all of our offices here.

Foreign income and information non-compliance

https://www.youtube.com/watch?v=g2UlIE8oxPA

If you’re under audit and have undisclosed foreign bank accounts and unreported foreign income see: https://klasing-associates.com/tax-audit-help-2/foreign-account-tax-audit-representation/

And the following links…

Here is a link to our practice video on warning signs than an audit has gone criminal.

What is an eggshell tax audit?

https://www.youtube.com/watch?v=saJLVlER-iM

What is an effective tax defense in an IRS eggshell tax audit?

https://www.youtube.com/watch?v=7qixPqWTtvA

So, you cheated on your taxes and you are under a tax audit…

https://www.youtube.com/watch?v=FZce4jqQJpI

Why should I hire a tax attorney to represent me in a tax audit?

https://www.youtube.com/watch?v=NDwc4GUfBX8