Do expats pay U.S. Social Security or self-employment tax on foreign earned income?
Self-employment and working abroad go hand–in–hand. They both offer freedom, unlimited potential, and a world of opportunities waiting to be discovered. But, as it turns out, they both also come with complicated U.S. tax filing requirements that — when not handled correctly — can result in some sticky situations and large tax penalties.
Self-employment taxes on foreign-earned income can be confusing, but the experts at H&R Block Expat Tax Services are here to help you understand the basics.
How self-employment & Social Security taxes work with foreign-earned income
First, you should understand the basics of self-employment taxes on U.S. based income. In the U.S., if you’re self-employed and your net earnings from self-employment equal $400 or more, you must do two things:
- File Schedule SE
- Pay self-employment tax (which includes Social Security taxes)
The IRS considers you to be self-employed if you own your own business or are an independent contractor. Self-employed Americans must make quarterly estimated tax payments to cover the federal income tax and self-employment tax — which includes your share of Social Security and Medicare taxes as well as the amount employers pay on the employees’ behalf.
For 2021, the U.S. self-employment tax rate is 15.3% on the first $142,800 of net income, which includes:
- 12.4% Social Security tax
- 2.9% Medicare tax
All of the above is still true if you’re self-employed and living abroad. You still have to pay that 15%, unless the foreign income you earned was in a country with a totalization agreement with the U.S.
If you’re self-employed abroad, you’ll still owe U.S. self-employment tax on foreign earned income. This is true even if you’re able to claim the foreign earned income exclusion. However, Social Security Totalization Agreements between the United States and many foreign countries may prevent you from being subject to self-employment taxes in both countries.
What’s a totalization agreement?
International Social Security agreements, better known as "totalization agreements," are similar to tax treaties, but for Social Security and Medicare taxes instead of income taxes. Totalization agreements serve two purposes:
- Eliminate double Social Security taxation issues for Americans abroad
- Help dictate benefit protections for expats who are living and working outside the U.S. (this includes helping those who divide their working years between countries quality for Social Security benefits in the country they retire)
Generally, if you’re self-employed abroad or earn income abroad and you pay the equivalent of Social Security and Medicare taxes to another country with a totalization agreement, then you likely won’t have to pay self-employment taxes to the U.S.
Not every country has a totalization agreement with the U.S., and if there is no totalization agreement you may have to pay self-employment taxes to both countries.
|Countries with U.S. Social Security Agreements|
If you’ve paid self-employment or Social Security taxes to another country, you may have to get a certificate of coverage in order to prove that you’re exempt in the U.S. Normally, you’d get one from your current country of residence, but each country is different. For example, if you’re filing U.S. taxes from Australia, you have to get a certificate of coverage from the U.S.
Other considerations if you’re self-employed and working abroad
While these are not the only considerations, if you’re self-employed and working abroad you may need to know:
- U.S. employers are required to withhold U.S. Social Security from the compensation paid to their employees working in the U.S. and also from those working overseas. Due to Social Security Totalization agreements made with 25 countries, a general exception to withholding U.S. Social Security can be elected by U.S. employees whose foreign service for the U.S. employer in a participating country is anticipated to exceed 5 years.
- Foreign employers are not required to withhold U.S. Social Security unless they are an affiliate of a U.S. company and have made an election to withhold Social Security for all of their U.S. employees.
- If you are working for a foreign employer who has no requirement to withhold U.S. Social Security, you have no obligation to remit U.S. Social Security taxes on your earnings. In fact, you’re prohibited from making such voluntary contributions to the U.S. Social Security System.
How to report foreign self-employment income with H&R Block
Not sure how to report foreign self-employment income? H&R Block makes it simple for expat entrepreneurs to report foreign income and file taxes abroad without a W-2. Here’s how to file your U.S. expat taxes online:
- Head on over to our Ways to File page
- Pick your journey — with you in control using our online DIY tool or letting a Tax Advisor guide you through the process.
- Once you’re through your chosen journey, you review your return and pay
- We file your return with the IRS
- You sit back knowing your self-employment taxes were done right
Self-employed and working abroad? Conveniently file your self-employed tax return with H&R Block Online Expat Tax Services.
Feeling lost about Social Security Totalization Agreements or filing taxes as a self-employed expat working abroad? No matter how complicated your U.S. tax return is, there’s an Expat Tax Expert ready to help. Get started with Virtual Expat Tax Preparation from H&R Block Expat Tax Services now!