Tax Tips for Self-Employed Expats
Are you an American Expatriate who has either started earning self employment income or strongly considering it? Whether you want to work as an independent contractor or you’re interested in launching your own business, the freedom of being your own boss definitely has its list of advantages. There is also an increased amount of responsibility, though – not only in the operation of your business, but also when it comes to satisfying both your foreign and United States tax obligations.
Understanding how the IRS determines your US tax liability as a self-employed US Expat will help you make better decisions for your business and be well prepared to file your US expat tax return at tax time. This article is intended to increase your awareness on 2 basic topics: Your responsibilities to the United States as an American Expat earning self-employment income and the additional deductions available to you as a US Taxpayer with business expenses.
Before we discuss your deductions and liabilities, let’s first define ‘self-employment income’.
Any income you earn in exchange for products or services that you provide in your own name or with an official DBA (Doing Business As) is self-employment income. This does not include income you earn as a hired employee. If you earn income as a hired employee (reported as salaries and wages on Form 1040) and you earn additional income as an independent contractor or business owner (reported as self-employment income on Form 1040), you must report these separately. You can choose to file both your personal and business income taxes on the same Form 1040, but you will use separate lines and additional forms to support and adjust each type of income.
Familiarize Yourself with Active Tax Treaties and Totalization or Bilateral Social Security Agreements between the United States and Your Host Country
If you’ve been living and working in a foreign country as an American Expatriate and you’ve filed a US expat tax return in the past, you may already be aware of any active tax treaties between the United States and your host country. If, however, you’ve never earned self-employment income as a US Expat, you may want to review the terms of the treaty once more. Knowing each country’s specific demands and allowances for you will empower you to make the most beneficial tax decisions. If you don’t understand the treaty, consult a tax attorney or contact a tax expert at Taxes for Expats who works with a team of professionals containing over 100 years of combined experience in US expat taxes.
Potential Additional Tax Liability
US Taxpayers earning self-employment income are generally liable for self employment taxes (Medicare and US Social Security) in addition to regular income tax. There is a chance you may not be responsible for these taxes either by terms defined in your host country’s tax treaty with the US or because you have a net loss from your business rather than a net income. You most likely will be required to pay Medicare and Social Security taxes if you have a net profit from self-employment income; but it’s definitely worth your while to find out the details, as your host country may offer you tax credits or other deductions to help minimize your overall liability.
Are You Required to Make Estimated Tax Payments?
If your self-employment income isn’t set up through a professional bookkeeping or accounting service and you’re not having taxes withheld, you may be accumulating tax debt and are therefore required to make quarterly estimated tax payments. Even if your tax liability isn’t high enough to cause the IRS to demand you to make estimated tax payments, it still may be in your best interest to avoid a high tax bill with penalties at the end of the year. Use Form 1040-ES to estimate your tax debt. If it’s higher than $1K, estimated tax payments are most likely mandatory for you.
Deduct all Qualifying Business Expenses
As a business owner (independent contractor included), the IRS makes all types of allowances for you. Not only for ordinary and necessary expenses for your business, but also for qualifying personal meals, entertainment, and other deductible expenses. Qualifying personal expenses may include: Meals consumed while on a business trip, overnight lodging, sightseeing or enjoying other forms of entertainment during your ‘down time’ on a business trip, and a variety of other expenses. For many of these personal expenses, you are limited to a deduction only equal to 50% of what you spent; so be careful to keep accurate records and calculate appropriately.
Ordinary and necessary expenses for the success and livelihood of your business are also deductible. This includes hardware, furnishings, cost of goods sold, employee wages, rent or mortgage and utilities, business miles and use of your vehicle, advertising expenses, consulting and training costs, and any other expense which is either ordinary for a business owner in your niche or necessary for you to conduct regular business. Most business expenses are 100% deductible for the current tax year, while other business expenses are capitalized. Capitalized business expenses are those for which you can only deduct a certain portion per year on your US expat tax return over a period of years.
If your expenses exceed $5K or are equal to your profit, you will have to file Schedule C, Profit or Loss from Business. If you want to limit your deductions to vehicle usage and qualifying meals and entertainment and you have a net profit to report, you may file Schedule C-EZ, Net Profit from Business. If you have a net profit but you also want to claim as many expenses as you’re allowed, you can choose to file Schedule C, Net Profit or Loss from Business.
Need Assistance with Your US Expat Tax Preparation?
We at Taxes for Expats have been helping international clients with complicated tax issues for over 20 years. If you need help understanding your tax liability, identifying qualifying deductions, or filing your US expat tax return let us help you.
I.J. Zemelman, EA is the founder of Taxes for Expats