Self-Employment Taxes When Working Outside the US
Are you a contractor or an employee? This tax self-identity crisis will depend on how your income is reported. Depending on where you are employed, IRS reporting requirements vary.
You are paid by a U.S firm
If payment for services rendered is listed in box 7 of Form 1099-MISC, Miscellaneous Income, the payer is treating you as a self-employed worker, also referred to as an independent contractor.
What does this mean for your filing requirements?
If you are in a self-employed trade or business, you must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship).
You also need to complete Schedule SE (Form 1040), Self-Employment Tax, and pay self-employment tax on your net earnings from self-employment of $400 or more.
- Unlike a traditional employer, there is no withholding of tax from self-employment income by the payor.
- As a self-employed individual, you may need to make estimated tax payments during the year to cover your tax liabilities.
What is self-employment tax?
Self-employment tax consists of 12.4% Social Security tax on up to $127,200 of your net earnings and a 2.9% Medicare tax on the entire net earnings.
For those that reside outside the U.S there are two primary exemptions to SE Tax
1. First possible scenario - paying into SS of a country that has a Totalization Agreement with the US. For that the following three conditions must apply:
a) You live and work outside of the United States.
b) You make contributions to the Social Security system of your resident country (ie - live in the UK, contribute to UK social security system).
c) Your country of residence has a Totalization Agreement with the US.
Then - if your tax return is prepared correctly you can avoid making duplicate payments to two SS systems (meaning you won’t have to pay US self-employment tax).
If you pay into the Social Security system of the country that does not have a Totalization Agreement with the US (ie - all countries with exception of the 24 ones listed below) - then you will have to pay US SS & Medicare taxes . On a positive side, if you accumulate sufficient amount of credits, you will qualify for the old age benefits from both countries.
- 24 countries that have entered into the bilateral Social Security Totalization Agreement with the US: https://www.irs.gov/individuals/international-taxpayers/totalization-agreements
- Brazil & the US have signed the Totalization Agreement in 2015 but it has not yet been enacted.
Second possible scenario - being a non-resident alien.
If the person receiving non-employee compensation (payment for independent services) is a nonresident alien, then their income is exempt from US Social Security tax regardless of the country he’s in (as long as he lives outside of the United States).
Unlike U.S. citizens who have a very different self-employment tax profile depending on whether they live in a country with a totalization agreement (such as Switzerland) or one that does not (such as Kuwait), the existence of the Totalization Agreement for nonresident aliens is irrelevant: this person is not subject to the Social Security laws of the United States.
1099 is not the same as W2
- Importantly - relief from the U.S. Social Security and Medicare contributions does not occur when a nonresident alien is treated as an employee of a U.S. firm and his/her compensation is reported on the US form W-2.
- This type of work - even if wholly performed outside of the United States - is defined as “Dependent Services” in IRS terms and is governed by a different set of rules.
- Earnings of nonresident aliens reported on W2 are subject to US income tax and US payroll taxes (Social Security and Medicare tax withheld by the employer).