August 18, 2023
Understanding the self-employment tax is crucial for individuals conducting business overseas. Whether you are a self-employed citizen or resident, the rules for paying self-employment tax are generally similar, regardless of your location. Here are some key points to keep in mind:
Self-Employment Tax:
The self-employment tax comprises social security and Medicare taxes. If your net earnings from self-employment reach or exceed $400 in a tax year, you must pay this tax. For 2023, the maximum amount of net earnings subject to the social security portion is $160,200, while the Medicare portion applies to all net earnings.
Nonresident Aliens
Nonresident aliens are generally not subject to self-employment tax. However, self-employment income you receive while you are a resident alien is subject to self-employment tax even if it was paid for services you performed as a nonresident alien. If you are a self-employed nonresident alien living in the United States and an international social security agreement is in effect, determining that you are covered under the U.S. social security system, then you must pay self-employment tax.
Effect of Foreign Earned Income Exclusion
When calculating your net earnings from self-employment, you must include all of your self-employment income, even if it is exempt from income tax due to the foreign earned income exclusion. Foreign earnings from self-employment can’t be reduced by your foreign earned income exclusion when computing self-employment tax.
Income from U.S. Possessions
If you are a U.S. citizen or resident alien and you own and operate a business in Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, or the U.S. Virgin Islands, you must pay tax on your net earnings from self-employment (if they are $400 or more) from those sources. This requirement applies regardless of whether the income is exempt from U.S. income taxes or whether you are required to file a U.S. income tax return.
Services for Foreign Government or International Organizations
For U.S. citizens, the income received for services rendered to a foreign government or international organization is reportable as self-employment income on their U.S. federal income tax returns. And, such income is subject to self-employment tax to the extent such services are performed within the United States.
International Social Security Agreements
The United States has established social security agreements, known as “totalization agreements” with foreign countries to coordinate social security coverage and taxation for individuals who have worked in one or more of the countries involved. Dual contributions (taxes) for the same work are eliminated under these agreements. The agreements generally ensure that social security taxes (including self-employment tax) are paid to only one country. As a result, individuals covered by these agreements typically pay social security and Medicare taxes only to the country in which they live.
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