International Tax Gap Series
If you are a self-employed U.S. citizen or resident, the rules for paying self-employment tax are generally the same whether you are living in the United States or abroad.
The self-employment tax is a social security and Medicare tax on net earnings from self-employment. You must pay self-employment tax if your net earnings from self-employment are at least $400.
Nonresident aliens are not subject to self-employment tax. However, self-employment income you receive while you are a resident alien is subject to self-employment tax even if it was paid for services you performed as a nonresident alien.
You are an author engaged in the business of writing books. You had several books published in a foreign country while you were a citizen and resident of that country. During 2014, you entered the United States as a resident alien. After becoming a U.S. resident, you continued to receive royalties from your foreign publisher. You report your income and expenses on the cash basis (you report income on your tax return when received and deduct expenses when paid). Your 2014 self-employment income includes the royalties received after you became a U.S. resident, even though the books were published while you were a nonresident alien. This royalty income is subject to self-employment tax in 2014.
Effect of Foreign Earned Income Exclusion
You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the foreign earned income exclusion.
You are in business abroad as a consultant and qualify for the foreign earned income exclusion. Your foreign earned income is $95,000, your business deductions total $27,000, and your net profit is $68,000. You must pay self-employment tax on all of your net profit, including the amount you can exclude from income.
Income from U.S. Possessions
If you are a U.S. citizen or resident alien and you own and operate a business in Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, or the U.S. Virgin Islands, you must pay tax on your net earnings from self-employment (if they are $400 or more) from those sources. You must pay the self-employment tax whether or not the income is exempt from U.S. income taxes (or whether or not you must otherwise file a U.S. income tax return). Attach Schedule SE (Form 1040) to your U.S. income tax return.
If you do not have to file Form 1040 with the United States and you are a resident of any of the U.S. possessions listed in the preceding paragraph, figure your self-employment tax on Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico).
Residents of Puerto Rico may file the Spanish-language Form1040 (PR).
Where to file Form 1040-SS:
If you are enclosing a check or money order, send your Form 1040-SS to:
Department of the Treasury
P. O. Box 1303
Charlotte, NC 28201-1303
If you are not enclosing a check or money order, send your Form 1040-SS to:
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
Services for Foreign Government or International Organizations
For U.S. citizens, the income paid for services rendered to a foreign government or international organization is reportable as self-employment income on their U.S. federal income tax returns, and is subject to self-employment tax to the extent such services are performed within the United States.
International Social Security Agreements
The United States has entered into social security agreements with foreign countries to coordinate social security coverage and taxation of workers employed for part or all of their working careers in one of the countries. These agreements are commonly referred to as Totalization Agreements. Under these agreements, dual coverage and dual contributions (taxes) for the same work are eliminated. The agreements generally make sure that social security taxes (including self-employment tax) are paid only to one country.
If your self-employment earnings should be exempt from foreign social security tax and subject only to U.S. self-employment tax, you should request a certificate of coverage from the U.S. Social Security Administration, Office of International Programs. The certificate will establish your exemption from the foreign social security tax. You can get more information about the Totalization Agreements on the Social Security Administration's web site.
To establish that your self-employment income is subject only to foreign social security taxes and is exempt from U.S. self-employment tax, request a certificate of coverage from the appropriate agency of the foreign country. If the foreign country will not issue the certificate, you should request a statement that your income is not covered by the U.S. social security system. Request it from the U.S. Social Security Administration. Attach a photocopy of either statement to your Form 1040 each year you are exempt from U.S. self-employment tax. Also print “Exempt, see attached statement” on the line for self-employment tax.
See the “Self-Employment Tax” information in IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for more detailed information about self-employment tax for U.S. citizens and residents abroad.
References and Links
- Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
- Foreign Earned Income Exclusion
- Services for Foreign Government or International Organization
- Social Security Administration: International Agreements, Payments Outside the United States, and Social Security in Other Countries
- Small Business and Self-Employed Tax Center
- Self-Employed Individuals Tax Center
The International Tax Gap Series