Published On: Sat, Apr 5th, 2014

U.S. Expats who are Self-Employed

us-passportSelf-employment tax (FICA) includes: Social Security and Medicare. For most people, this tax is equal to 15.3% of the reported net income. Normally, employers and employees split this tax responsibility. However, the self-employed individual is both employer and employee, and therefore, is responsible for the entire amount.

For self-employed expats, the bad news is that they cannot find relief through the foreign earned income exclusion. As far as FICA tax is concerned, there is no foreign earned income exclusion – self-employed expats are required to pay FICA tax on their entire net business income.

Is there an easy, legal way to avoid the full FICA tax? Unfortunately, the answer is no. One legal, but not-so-easy approach would be to form a Controlled Foreign Corporation (CFC), and then be hired as an employee. Since the CFC is a foreign entity, the IRS cannot force it to pay the employer portion of FICA. Therefore, you could attempt to file your income as wages on Form 1040, rather than on Schedule C.

There are 2 issues with this approach. First, there’s more paperwork involved (e.g., Form 5471). Second, if you are the only owner of the CFC, the IRS may find this tactic questionable. Especially for sole-proprietors with small-scale businesses, it’s probably not worth the hassle simply to lower FICA taxes.

 

 

This article was written by John Ohe (IRS Enrolled Agent and managing partner at Hola Expat). For more information, visit us: HolaExpat.com

 

Disclaimer: The answers provided in this article are for general information, and should not be construed as personal tax advice. Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved.

 

 

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