In essence, if you pay for Social Security and Medicare in the country you are working in, you will usually not have to pay U.S. Social Security and Medicare taxes.
So you’ve made the leap to digital nomad. You’re enjoying a life of new sights, sounds, and food while still earning a living and saving for retirement. You spend your days in cafes if you’re freelancing, or in interesting new office environments if you’re working abroad. Life is good.
But as a citizen of the USA, you may still need to pay taxes. While most money earned in a foreign country is tax exempt, if you are self-employed, the government considers you a company and an employee. This means your taxes go to fund Social Security and Medicare in line with all other employers in America.
These tax laws can be complicated, and whether or not you need to file is often a question on the expats mind. Let’s go over some of the basics of filing for tax returns as a self-employed expat so you can put your mind at ease. Expat services are also available to help you navigate the expat tax laws, and avoid heavy tax penalties.
How Foreign-Earned Income Affects Taxes
This first part is simple: if you are self-employed and earn more than $400, you have to file a Form 1040 and pay self-employment tax. Self-employment is defined by the IRS as owning a business or working as an independent contractor. As a self-employed American, you must make estimated tax payments every quarter in order to cover both self-employment tax and federal income tax. These will go towards funding both Social Security and Medicare, so they still benefit the taxpayer even if they are living abroad.
As of 2021, the tax rate for self-employment tax is 15.3% of the initial $142,800 earned. 12.4% goes towards Social Security while 2.9% goes towards Medicare. The only exception is if you are in a country that has a totalization agreement with the United States.
How Totalization Agreements Work
These agreements can be called International Social Security agreements and serve as tax treaties for taxes funding Social Security and Medicare. They are in place to curb problems involving double Social Security taxation and help divide benefit protections for Americans living in other countries. This is especially important for those trying to qualify for Social Security in either country after retirement.
In essence, if you pay for Social Security and Medicare in the country you are working in, you will usually not have to pay U.S. Social Security and Medicare taxes.
Keep in mind that the list of countries under totalization agreements with the U.S. is rather small, so it’s a good idea to check if your country qualifies. If you are not in a country with this agreement, you may have to get a certificate of coverage to prove that these taxes were paid to the foreign government.
FAQ About Self-Employed Expats
Do Foreign Employers Take Social Security Taxes Out of My Paycheck?
A foreign company will not likely withhold your Social Security or Medicare tax amounts unless they are affiliated with a U.S. company. This means you should take special care to set aside enough money to pay for your taxes.
If My Employer Has No Requirement to Withhold Social Security, Do I Have to Pay It?
While working for a foreign employer that does withhold U.S. Social Security, you will not be required to pay it. On the contrary, it is illegal to make contributions to the United State Social Security System. Note that this does not necessarily apply to self-employed expats.
What Happens if I Don’t File My Taxes as an Expat?
Normally there is a 7-year statute of limitations on taxes, but in situations where the IRS suspects an individual of under-reporting on their tax return or an individual fails to file taxes, the IRS is able to go back as far as they want to find tax fraud. These can lead to heavy fines that will often be more than you would have paid.
Your life abroad is a big step, but be mindful that as long as you are an American citizen, taxes will require yearly attention. Enjoy your time working abroad, but remember to file in April.
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