Self Employed Tax Return Preparation
If you are a self-employed US citizen or resident alien residing abroad, you need to consider additional US Social Security tax implications. The country you live in—and for how long— will have a significant impact on how you are taxed for social tax purposes, both in the US and in your resident country.
At Universal Tax Professionals, we specialize in every aspect of US tax matters. If you’re a self-employed American living abroad and require assistance with filing your 2023 Self-Employed Tax Return, don’t hesitate to reach out. Our team of international accountants have the knowledge and proficiency needed to address your unique tax circumstances. Additionally, we provide a range of other US expat tax services tailored to meet the specific needs of US expats.
Self-Employment Abroad – US Tax Considerations
For self-employed US expats, the threshold for filing a 2023 US tax return (to be reported in 2024) is relatively low: $400 in worldwide net self-employment income will require filing a return and reporting worldwide income.
Self-employed US expats are required to pay US Social Security taxes imposed at a rate of 15.3% on their net self-employment income—double that of employees. Self-employed taxpayers are essentially paying for both the employee and employer portions of Social Security and Medicare taxes. This rate is comprised of 12.4% OASDI Social Security tax plus 2.9% Medicare tax.
It is important to note that while a self-employed US expat might be able to fully exclude his foreign-source net employment income from US taxation by claiming the Foreign Earned Income Exclusion on Form 2555, he cannot similarly exclude foreign-source net employment income from Social Security tax, as calculated on Schedule SE.
However, if the self-employed US expat lives and works in the foreign country for an extended duration, he may be able to obtain an exemption from US Social Security tax and only pay social tax in the foreign country—see Self-Employment Abroad – Foreign Residency and Tax Considerations, below.
Key Components of Self-Employment Tax Return
Table of Contents
Understanding the core components of the Self-Employment Tax Return is essential for US expats to accurately report their income and fulfill their tax obligations.
Reporting your self-employment income requires meticulous attention to detail. Begin with Schedule C, a form which is specifically designed for reporting profits and losses from business activities. For US expats, it’s crucial to include all sources of income, both domestic and international, ensuring comprehensive reporting.
Utilize supporting documentation, such as invoices, receipts, and financial statements, to substantiate the figures you report.
Maximizing allowable deductions is a key strategy for reducing your taxable income. As a self-employed US expat, you’re entitled to deduct legitimate business expenses, lowering your overall tax liability. Common deductions include business-related travel expenses, office supplies, marketing costs, and professional fees.
Furthermore, home office deductions can be particularly advantageous, especially if you maintain a dedicated workspace for your business activities.
Quarterly Estimated Tax Payments
Self-employed individuals, including Americans living abroad, are typically required to make quarterly estimated tax payments to cover their anticipated annual tax liability. Failure to make these payments can result in penalties. To determine the appropriate amount for each quarterly payment, use Form 1040-ES and consider your expected income, deductions, and credits for the tax year.
Self-Employment Abroad – Foreign Residency and Tax Considerations
Self-employed US expats residing in a foreign country are required to pay any social security taxes imposed in that country on their foreign-source income, as well as income taxes. However, the US has a large tax treaty network (called Totalization Agreements) with 30 countries. This network is designed to prevent US expats from paying social security taxes both in the foreign country and in the US.
Suppose the US citizen or resident alien intends to be abroad longer than five years. In that case, he or she will pay social taxes only in the foreign country and not to the US, subject to the terms of the individual totalization agreement. The contributions made to either country under the terms of the totalization agreement are counted towards both countries’ state pension entitlement.
The 30 countries with which the US has a social security totalization agreement in place are:
Australia, Austria, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Korea, Spain, Sweden, Switzerland, the United Kingdom, and Uruguay.
Need Your Schedule C Prepared for Your Sole Proprietorship and More Guidance on Your Self-Employment Abroad?
Universal Tax Professionals prepares Schedule C for self-employed US expats as part of the federal tax return package at a flat rate. We can answer all of your questions on how your self-employment income is taxed both in the US and your resident country. Contact us today to get started!