You may not have anticipated that you would still be subject to taxes in the United States when you planned to migrate to a foreign nation. If you discover this information too late, you may be faced with an unexpected tax bill, which might have a major impact on your finances. Self-employment taxes are one issue you should be aware of if you decide to start your own business after relocating abroad.

Even if you’re a US citizen living overseas, taxes are still something to worry about, even if it’s easy to believe that you’ve avoided the usual stress that comes with submitting a federal tax return every April. Contrary to common opinion, even if you move to a different nation, you are still required to submit a US federal tax return. We’ll explain why in this post, along with the frequently asked questions about the matter. 

Do American Citizens Living Abroad Have to Pay Self-Employment Taxes?

Yes, as a US citizen residing overseas, you must file a US federal tax return and pay US taxes on your global income, regardless of where you live at the time. Therefore, you are subject to the same income tax regulations as persons living in the United States.

While virtually the majority of the 244 independent territories use territorial, residency, or no income taxation at all, only two governments, the United States and Eritrea use citizenship-based taxation. This addresses the topic, “Do American Citizens Living Abroad Have to Pay Self-Employment Taxes?”

Self-Employment Taxes: How Much Do I Pay?

Foreign income is taxed at the same marginal rate as domestic income in the United States.

This implies that you, as an American living abroad or a Green Card holder, will have to submit a US federal tax return this year if your total income in 2021 exceeds any of the following minimal criteria, regardless of where the money was received (and in what currency):

For married citizens filing jointly:

• $25,100 both spouses under age 65;
• $26,450 one spouse under 65 and the other spouse is 65 or older
• $27,800  both spouses age 65 or older

For married citizens filing separately: $12,550

Citizens filing as single: 

• $12,550 if under age 65
• $14,250 if age 65 or older

Citizens filing as a widow with a dependent child:

• $25,100 under 65
• $26,450 age 65 or older

Citizens filing as Self-Employed: $400

Citizens filing as head of household:

• $18,800 under 65
• $20,150 age 65 or older

Even if you did not stay in the United States during that year and earned all of your income in another country, the IRS still expects you to submit a tax return.

In addition, depending on where you lived previous to relocating overseas, you may be required to file a state tax return. This rule can confuse the subject of how much tax you owe if you work abroad.

Can I Avoid Paying for Self-Employment Taxes?             

The only method to avoid submitting a US tax return and paying US taxes overseas under current US tax legislation is to give up your US citizenship. Renouncing your citizenship in the United States is a serious and irreversible choice that should not be made lightly. Before contemplating this choice, make sure you understand all of the conditions and ramifications of renunciation of citizenship.

Therefore, as long as you are a US citizen or have a green card, you must submit an annual tax return and pay the corresponding taxes while residing overseas. However, by taking advantage of unique tax credits, deductions, and exclusions available to Americans living overseas, you may avoid double taxation and decrease your US tax payment.

What Happens If US Citizens Don’t File Taxes While Living Abroad?

US residents who do not submit US taxes while living in another country may face fines, interest charges, or possibly criminal accusations. The IRS imposes late filing and late payment penalties. If your failure to file is intentional, you willfully evade your US tax obligations while living abroad and may face more significant legal repercussions.

Penalty for Failure to Pay: 5% of taxes owed for each month the tax return is late, up to 25%.

Penalty for Failure to Pay: 0.5 percent of unsettled taxes for each month the tax payment is, up to 25% of the unpaid taxes

Over 60 Days Late: This penalty is limited to 25% of your overdue taxes.

Fortunately, the IRS provides a penalty-free option for Americans living abroad to get caught up if they didn’t know that they needed to submit US taxes while residing abroad. Regardless of how many years you’ve skipped, the Streamlined Filing Procedures only need you to submit the previous three years of Federal tax returns and the last six years of FBARs, making it a more straightforward and less expensive option to become compliant.

Besides Self-Employment Taxes, What Other US Taxes are Required For Citizens Living Abroad?

When it comes to paying your US ex-pat taxes, you’ll need to disclose more than just your earned income. The IRS also requires you to reveal any overseas accounts or assets worth more than a specific amount. Even contributions to international retirement funds that appear to be tax-deferred may be taxed!

Make sure you are aware of the following extra tax responsibilities for US citizens residing abroad:

• Foreign Bank Account Disclosure (FBAR)
• The Foreign Account Tax Compliance Act (FATCA) is a federal law that (FATCA)
• Passive Foreign Investment Company Tax Rules

It’s critical to understand everything you’re obliged to record in your file, especially if you’re doing US taxes from abroad.

Wrapping It Up

We can assist! Our committed CPAs and IRS Enrolled Agents staff have ex-pat tax knowledge to assist American people residing overseas. Taxes and regulations might be complex, but we can help you in navigating federal tax returns in a way that makes sense for your specific scenario.

If you’re ready to file, get started now, and we’ll connect you with one of our expat-friendly accountants.

Do you have any queries before you begin? Contact us right now to get the answers you need.