Self-employment can be tricky as a US expat. It’s difficult to know who the IRS actually considers self-employed and if you are classified as such, how will you be taxed? Expats often have slightly unique situations—such as working a full-time job and earning additional money ‘on the side’. So let’s take a closer look at the top 5 things you need to know if you are (or may be!) a self-employed American living overseas.
1. What is a self-employed individual?
As a general rule, you are not treated as self-employed for US tax purposes if you are categorized as an employee. So this means that if you work for a foreign or US employer and are considered an employee, you are not self-employed and you do not need to pay self-employment tax. If you are self-employed, you must file a US tax return if your income exceeds $400 (yes, you read that right—only $400!).
2. What is self-employment tax?
Essentially, self-employment tax is your Social Security and Medicare payments to the US. The current rate is 15.3% and you can pay these taxes at the time taxes are due or pay estimated quarterly payments throughout the year. Remember that if you are paying at the end of the tax year, you must pay any taxes owed by April 15th, (not the expat tax deadline of June 15th), as this is when penalties and interest begin to accrue.
3. Where do I make my Social Security payments?
No matter how you earn your income, Social Security payments must always be paid to someone! You may actually be subjected to the dreaded dual taxation—meaning, you pay Social Security taxes to both the US and your host country.
To prevent this, the US has entered into agreements with 24 countries that determine which country you pay Social Security to—so it is important to know if your host country has such an agreement and t also check the fine print!
For example, the US-UK agreement says that if you’re self-employed and you only want to pay into the UK national insurance system, you actually have to volunteer or opt out of the US Social Security system. If you don’t do that, you’re still required to pay into both systems.
However, in general, if you’re self-employed and working overseas you’ll pay into the US Social Security system. If you work primarily for a foreign employer, you’ll most likely pay into the system of your country of residence.
4. What if I earn money on the side?
As noted above, if you are a regular employee overseas, you will not be taxed as self-employed. But that doesn’t mean your additional earnings are tax-free! While additional income doesn’t automatically classify you self-employed in the eyes of the US, you will still need to be report it on your Form 1040. And as you may have guessed, it is taxable in the US!
5. Can I exclude my additional income from taxation?
The good news here is that your additional income will be included in your foreign sourced income, which may be excluded from US tax liability. Using the Foreign Earned Income Exclusion, you can exclude up to $100,800 from US taxes (in 2015). So as long as your total income doesn’t exceed the $100,800 threshold, you will not owe any taxes on the additional income you earn. Remember that in order to be eligible to use the Foreign Earned Income Exclusion, you must qualify as a US expat by passing one of two residency tests: the Physical Presence test or the Bona Fide Residence test.
Any additional money earned in the US or from a US source is not ‘foreign earned’ and therefore cannot be excluded with the Foreign Earned Income Exclusion.
If you have any questions about your income, how to report it or what taxes you will be required to pay, we highly recommend that you speak to an expat tax professional.
Failure to pay US taxes can result in steep penalties and excessive interest!
This post was written by David McKeegan, co-founder of Greenback Expat Tax Services. Greenback specializes in the preparation of US expat taxes for Americans living abroad. Greenback offers straightforward pricing, a simple, hassle-free process, and CPAs and IRS Enrolled Agents who have extensive experience in the field of expat tax preparation.
For more information about Greenback Expat Tax Services or your US expat tax obligations, please contact us or visit www.greenbacktaxservices.com.
