August 20, 2024
If you have become an independent contractor, you may be liable for U.S. self-employment taxes. As a self-employed individual working abroad, you are required to pay self-employment taxes. (subject to exception if a “totalization agreement” discussed below in further detail, applies)
Self-Employment Taxes
U.S. self-employment tax includes both the “employer” and “employee” share of social security and Medicare taxes. You must file a Schedule C with your U.S. income tax return and self-employment tax paid on your net earnings by filing a Schedule SE. The self-employment tax rate is 15.3 percent of net Schedule C income before any foreign income exclusion. You are generally responsible for self-employment tax if your annual net earnings from self-employment are at least $400. For 2024, the maximum amount of net earnings from self-employment subject to the social security portion of the tax is $168,600. All net earnings are subject to the Medicare portion of the tax.
If you are a U.S. citizen residing abroad, you are subject to self-employment tax as though you reside in the U.S. unless an agreement between the U.S. and the country in which you reside exempts you from self-employment tax.
Totalization Agreements
Totalization agreements generally provide that self-employment income earned while working and residing in a foreign county is exempt from U.S. self-employment tax to the extent it is subject to taxes or contributions for social security of the foreign country in which you are working. You must secure a statement from the foreign government to substantiate your exemption from self-employment tax. If you cannot obtain one, the Social Security Administration (SSA) will issue you one. Additionally, you cannot claim any credits to offset your self-employment tax. The credits allowed against income tax will not reduce your self-employment tax.
If you divide your work between the U.S. and a foreign country, you may fail to qualify for retirement, survivors or disability insurance benefits from one of both countries if you have not worked long enough or recently enough to meet eligibility requirements. However, under a totalization agreement, you may qualify for partial or foreign benefits based on combined or “totalized” coverage credits from both countries. To qualify for benefits under the U.S. social security program, you must earn enough work credits to meet specified “insured status requirements.”
“Insured status requirements” are the qualifications needed to receive social security benefits. To be eligible for retirement, survivors, or disability benefits, you must be insured under the Social Security program. Your insured status is determined by the number of work credits, or "quarters of coverage," you have earned. You receive one credit for a specific amount of work each year, with a maximum of four credits per year. The number of credits required depends on the type of benefit. For more details on insured status, please visit the Social Security Administration website.
Under a totalization agreement, if you have some U.S. coverage but not enough to qualify for benefits, the SSA will count periods of coverage that you earned under the social security program of an agreement country.
Understanding self-employment tax issues raised by working abroad can be complicated. If you have questions about your tax situation as a U.S. worker working abroad, please contact our office.
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