Taxation guidelines for self-employed US expats

All US citizens and green card holders have to file taxes with the IRS, no matter where in the world they’ve sourced their income. American expats who are self-employed have a threshold of $400 per year, meaning anything above $400 has to be declared. Up to this day, many Americans are still unaware of this, exposing themselves to dire penalties.

Deadlines for filing taxes

The deadline for filing expat income taxes is April 15^th but expats get an automatic extension to June 15^th if they are late. They can also request the deadline to be extended further to October 15^th in case they are still not ready to file. An example is when they have to file some complex foreign taxes first. 

Following the outbreak of COVID-19 around the world, the IRS has given all citizens a 90-day extension on their federal tax filing, from April 15^th to July 15^th.

Elimination of the risk of double taxation

The US has made provisions to protect expats from double taxation in countries where they still have to file local taxes. The US has done this through tax treaties signed by several countries around the world. Contrary to ignorant opinion though, the tax treaties don’t exonerate an expat from his or her IRS tax filing obligation.

Tax exemptions

Just like the employed expats, self employed American expatriates can take advantage of the tax exemptions that the IRS has provided. These include the Foreign Earned Income Exclusion (FEIE), that lets experts exclude their first $100,000 income from IRS taxation. The amount is adjusted for inflation annually and now stands at $107,600 in 2020. You claim this exemption by filing Form 2555.

Another exemption is the Foreign Tax Credit (FTC) which lets expats claim tax credit on their foreign income up to the amount of taxes they've already paid abroad. The provision is applied only to foreign-sourced income and thus expats may still have to claim FEIE if they have a US-sourced income.

Self-employed tax rates

Self-employed American expats need to file self-employed taxes with the IRS. These are made up of 12.4% social security tax, and a 2.9% Medicare tax on their entire income, adding up to 15.3% in total.

The tax exemptions discussed previously do not offset these welfare taxes. Special situations where a self-employed expat may not need to file these taxes include cases where they’ve set up a corporation in a no-tax jurisdiction, and the corporation actually employs them.