Self-Employment Income

The Self-Employment Tax Exemption for U.S. Expats refers to provisions that may allow U.S. citizens or residents living abroad to reduce or avoid paying U.S. self-employment taxes (Social Security and Medicare taxes) on income earned from self-employment activities.

For U.S. expats, the situation is complex, as they are still subject to U.S. taxation on worldwide income, including self-employment income. However, there are specific provisions that could potentially exempt them or reduce the amount of self-employment tax they owe.

1. What is Self-Employment Tax?

Self-employment tax is the U.S. tax that covers Social Security and Medicare benefits for self-employed individuals. The self-employment tax rate is 15.3%:

• 12.4% for Social Security
• 2.9% for Medicare

Additionally, there is an additional 0.9% Medicare tax on self-employment income over a certain threshold for high earners:

• $200,000 for single filers
• $250,000 for married couples filing jointly.

2. Self-Employment Tax for U.S. Expats

• As a U.S. citizen or U.S. resident, you are required to pay self-employment taxes on your self-employment income, even if you live abroad.
• This tax is separate from your income tax and is specifically for funding Social Security and Medicare programs.
• Self-employment income includes money earned from freelance work, contract work, or running your own business.

3. Social Security Agreement (Totalization Agreement)

One of the primary ways an expat might avoid or reduce self-employment taxes is through a Totalization Agreement between the U.S. and certain foreign countries. These agreements are designed to avoid double taxation on Social Security taxes, ensuring that you only pay into one country’s system at a time.

Here’s how it works:

• Totalization Agreements: The U.S. has agreements with over 30 countries (such as the U.K., Canada, Germany, and Japan) to prevent double taxation of self-employed individuals. If you are working in a country that has a Totalization Agreement with the U.S., you may be exempt from paying U.S. self-employment taxes (for Social Security and Medicare) on income earned in that country, provided you pay into the foreign social security system.
• These agreements specify which country has the right to collect Social Security taxes and can provide an exemption for self-employed individuals from paying both U.S. and foreign social security taxes on the same income.

For example:

• If you are self-employed in a country that has a Totalization Agreement with the U.S., and you are required to pay into the social security system of that country, you might not have to pay U.S. self-employment tax on that same income. However, you would need to pay into the foreign country’s system.

4. Foreign Earned Income Exclusion (FEIE) and Self-Employment Tax

• The Foreign Earned Income Exclusion (FEIE) allows U.S. expats to exclude up to $120,000 (for 2023) of foreign earned income from U.S. income tax.
• However, the FEIE does not exempt you from self-employment taxes. This means that even if you exclude your foreign earned income from U.S. income tax through the FEIE, you would still be liable for self-employment taxes (Social Security and Medicare) on that income.