How to Report Foreign Self-Employment Income
- Forms for Foreign-Self Employment Income Reporting
- Step by Step: How to Report Foreign Self-Employment Income
- What Counts as Foreign Self-Employment Income?
- What Is the US Self-Employment Tax Rate?
- How to Make Adjustments to Quarterly Tax Payments
- How to Reduce Self-Employment Tax Liability?
- Get Help With Your Foreign Self-Employment Taxes
The life of an entrepreneur comes with plenty of perks–but also plenty of complications. This is especially true for self-employed expats, who may face additional tax reporting requirements.
The good news is that you can pursue your dream career while still maintaining a reasonable tax bill. In this guide, we’re going to talk about how to report foreign self-employment income and what taxes you can expect to pay as a self-employed expat.
Key Takeaways
- All self-employed US citizens who meet certain income thresholds must report foreign self-employment income, regardless of where they live or pay foreign tax. Do so by filing individual income tax Form 1040, attaching supplemental schedules 1 and 2,, Schedule C, and Schedule SE.
- The Foreign Earned Income Exclusion, Foreign Tax Credit, and Foreign Housing Exclusion can reduce your US regular income tax.
- Self-employment tax, which funds Social Security and Medicare, cannot be mitigated by the above credits. However, if you pay into a foreign Social Security scheme in a country with a “totalization agreement” with the US, you have the option of not paying US self-employment tax.
Forms for Foreign-Self Employment Income Reporting
Staying on top of taxes while living abroad can feel overwhelming. Luckily, tax preparers will file the appropriate forms on your behalf, but knowing how the underlying process works is worthwhile.
Here are the tax forms foreign self-employed expats commonly use.
- Form 1040: Used to report overall income. This is the master document for individuals to which you’ll attach all other information.
- Supplemental schedules 1-3: In 2018, the IRS changed Form 1040, migrating information not commonly used into supplemental documents. All self-employed expats need Schedules 1 and 2, while those who claim the Form 1116 foreign tax credit will also use Schedule 3.
- Schedule 1: includes reporting business income.
- Schedule 2: includes reporting self-employment taxes.
- Schedule 3: includes reporting tax credits and payments.
- Schedule C: Calculates detailed information about business income and expenses operated by sole proprietors or single-member LLCs, which flows to Schedule 1.
- Schedule SE: Calculates Social Security and Medicare taxes on self-employment income. This result is transferred to schedule 2, where self-employment taxes are reported.
- Form 1116: Allows expats to claim a credit for foreign taxes paid to offset US tax. Use Schedule 3 to indicate this to the IRS.
- Form 2555: Allows expats to exclude foreign income from US tax. Use Schedule 1 to indicate this to the IRS.
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Step by Step: How to Report Foreign Self-Employment Income
- Check if you meet the self-employment income threshold requiring you to file a return with the IRS. If you net more than $400, you are required to file a tax return.
- If you expect to owe at least $1,000 in taxes, plan to submit estimated quarterly tax payments. These are not necessary to make, but by doing so you will avoid potential penalties and will avoid a surprisingly high tax bill when your return is prepared.
If you’re unsure what you’ll owe, use last year’s tax return to estimate, including both regular income and self-employment taxes. If you underestimate, you can pay the remainder of your bill at the end of the year. Conversely, the IRS issues refunds for overpayment. You can use the IRS direct pay portal for these payments.
- If you were paid in foreign currency, use the annual average exchange rate to convert to USD.
- Complete Form 1040 Schedule C, which details business income and expenses for sole proprietors and single-member LLCs.
To make this easier, maintain good records of income and expenses. While accuracy is essential in the case of an audit, saving money by maximizing your business expense deductions is perhaps more relevant. Being diligent is worthwhile; the IRS allows business owners to deduct expenses, while W-2 employees generally cannot claim any deductions.
- Transfer the net profit or loss declared on Schedule C line 31 to:
- Schedule SE, line 2
- Schedule 1, line 3
- Calculate Social Security and Medicare taxes owed using Schedule SE. Transfer the result to Schedule 2, line 4.
- Check for opportunities to reduce your tax bill through deductions, credits, and other benefits. Expats most commonly use the Form 2555 Foreign Earned Income Exclusion or Form 1116 Foreign Tax Credit. You can claim both the FEIE and FTC, but not for the same income.
- Note the FEIE on Schedule 1
- Note the FTC on Schedule 3
Read our linked articles for further information, and consider consulting a Greenback Expat Tax Services team member to decide which route is most advantageous for your situation
- Complete Form 1040, attaching Schedules 1-2, Schedule SE, Schedule C, and (if you claim the FTC) Schedule 3.
- Transfer Schedule 1 result to line 8 of Form 1040
- Transfer Schedule 2 result to line 17 of Form 1040
- Transfer Schedule 3 result to line 20 of Form 1040
It is best to E-file your tax return, but it is also possible to print and mail it.
What Counts as Foreign Self-Employment Income?
Foreign self-employment income refers to money earned as a freelancer, contractor, sole proprietor, or business owner outside regardless of where you live. It includes income from gig work and part-time businesses. It does not include any income earned as an employee.
What Is the Threshold for Reporting Foreign Self-Employment Income?
The government requires that you file an income tax return if you have $400 or more of net earnings from self-employment, regardless of age.
What Is the US Self-Employment Tax Rate?
Self-employment income is subject to self-employment tax, which funds Social Security and Medicare. Working as an employee in the US, you can see the 7.65% that is deducted from your pay. However, most people are not aware that employers must match that 7.65%, resulting in a total of 15.3% of tax. Being self-employment means you are considered to be both the employee and the employer and are therefore responsible for the entire 15.3%.
In addition to self-employment tax, you also pay regular income tax, which increases progressively according to your income level.
How to Make Adjustments to Quarterly Tax Payments
To adjust your payments, recalculate your expected net earnings and taxes using your latest financial estimates, then spread the total across the remaining payment periods. This keeps your payments in line with actual income, helping you avoid underpayment penalties or excessive overpayments. If your income varies throughout the year, you might need to increase or decrease your estimated tax payments.
Payment Due Dates
Estimated quarterly payments are due on the following days. If a date falls on a weekend or legal holiday, the payment is due on the next business day.
| Payment Period | Due Date |
| Q1: January 1 to March 31 | April 15 |
| Q2: April 1 to May 31 | June 15 |
| Q3: June 1 to August 31 | September 15 |
| Q4: September 1 to December 31 | January 15 |
How to Reduce Self-Employment Tax Liability?
Unfortunately, there is no magic bullet to erase your US tax obligations when working abroad. However, the IRS does have options to help expat entrepreneurs reduce how much they have to pay. These options include:
- Business deductions
- Tax treaty benefits
- Totalization agreements
- Foreign Earned Income Exclusion
- Foreign Tax Credit
- Foreign Housing Deduction
Use an S Corporation
In addition to the above, a business owner can mitigate self-employment taxes by electing to be taxed as an S corporation.
The owner of an S-Corp has two types of taxable income: salary and distributions (dividends). Any income regarded as salary is subject to self-employment tax, while income regarded as a distribution is not. Because of this, many S Corp owners are tempted to pay themselves a very low salary to minimize self-employment tax. However, the IRS requires you to draw “reasonable compensation” as a salary. If your salary is too low, the IRS may recharacterize your distribution as a salary, assess additional self-employment tax, and assess large penalties. Additionally, S-corp salary income is eligible for the Foreign Earned Income Exclusion, while distributions are not. Whether or not this strategy makes sense depends on your specific circumstances, including whether you are an expat and how profitable your company is. Unfortunately, there is no one-size-fits-all solution, and you should, therefore, consult with a tax professional to determine your best options.
Use a Foreign Incorporated LLC
If you do business through a foreign corporation your salary may not be subject to US self-employment tax. Using the Foreign Earned Income Exclusion, this income can also be excluded from US tax.
However, establishing a foreign corporation creates complications. The IRS estimates that completing the necessary paperwork to file as a foreign corporation can take over thirty hours, even for a knowledgeable professional. Additionally, incorrectly filing could result in $10,000 per year or more penalties.
Get Help With Your Foreign Self-Employment Taxes
We hope this post has helped you understand how to report your foreign self-employment income and how you can optimize your US taxes. Still have questions about your foreign self-employment taxes? We have the answers.
If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
