Self Employment Tax for US Expats (and the certificate of coverage)

Many self employed expats are surprised to hear about self employment tax (SE Tax) – which is not reduced by the foreign earned income exclusion or foreign tax credit.

SE Tax is not income tax. It is the Social Security and Medicare that is not taken out of the paycheck of a self employed taxpayer. That’s because there generally is no “paycheck” for most self employed taxpayers, of course.

Depending on their country of residence, expats may be exempt from US self employment tax by providing proof that they are covered under the social security system in their resident country. This avoids the double taxation of social security and Medicare taxes.

To do so, the US Expat Taxpayer must seek a certificate of coverage from their resident country, seek a statement from the US Social Security Administration, and/or provide proof of payments.

Disclaimer: Taxes for expats living abroad are extremely complex. We insist that your best bet is to hire a tax professional who specializes in these tax returns. There are so many unique situations that can lead to penalties and more taxes. This guide is very general and does not replace the IRS publications on how to stay compliant with your taxes.

If you would like to hire us to prepare your US Expat taxes, click here.

Income tax vs. self employment tax and the foreign earned income exclusion and the foreign tax credit

Unlike income tax, SE Tax is NOT excluded from income under the foreign earned income exclusion or credited under the foreign tax credit. Those provisions are for reducing income taxes only.

Fortunately, many countries have a  “totalization treaty” with the US, to where the US person paying social taxes to that country is exempt from paying them in the US.

The slightly good news is that even if you end up having to pay this tax, in theory you will get much of it back when you are older.

Policy makers are essentially making sure that at least one country or the other with help us when we are old and not leave us old, homeless, and without health care.

Self employed expats must attach proof of coverage to their US Tax Return

The IRS says,:

“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.”

You can read more about self employment tax for US Citizens and Residents living abroad here.

What if I can’t get a certificate of coverage or a statement from US Social Security?

While this is not official, we have submitted tax returns simply with “proof of payment”of these taxes, along with an explanation that the taxpayer exhausted all efforts in trying to get the certificate or statement, and so far we have not had any of them kicked back or disallowed.

Still, we strongly suggest trying to get one, and we insist that our clients at least try. We have seen lots of success in clients obtaining these certificates or statements form the appropriate agency of their resident country with little problems or delay.

Once you have it, you can attach a picture of it to your tax return each year and file stress-fee knowing that you will not have a tax bill with interest.

Check out our full guide for US Citizens living abroad here.

If you would like to hire us to prepare your US Expat taxes, click here.

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