Self-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.

Self Employment Tax and US Expats

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, self-employed individuals are required to pay FICA on their entire net business income.

Is there an easy, legal way to avoid FICA tax? Unfortunately, the answer is no. One legal, but somewhat tedious approach would be to setup a foreign corporation, and then be hired as an employee. Since the corporation is a foreign entity, the IRS cannot force it to pay the employer portion of FICA, and for practical reasons, require foreign companies to collect the employee portion.

There are two issues with this approach. First, there’s more paperwork involved (e.g., Form 5471). But depending on the level of income, the hassle may be easily worth it. Second, if you are the only owner of the foreign corporation (and the company is providing a service), the IRS may find this tactic questionable. The specific tax code involved is beyond the scope of this article.

Many US expats may also need to pay social security tax in their local country (double taxation). However, there are a handful of countries where an International Social Security (Totalization) agreement exists. These agreements define to which country the person should pay social security tax. Click here for more information on U.S. International Social Security Agreements.

For general information on US expat taxation, please read: US Taxes for Americans Living Abroad – Ultimate Guide.