Expat Freelancer or Employee – Tax Obligations in Your Home Country
As an American citizen or Green Card holder, living and working in a foreign country as an expat has its share of positives and downsides. While you can take advantage of the various financial and non-financial benefits of your host country, it is essential for you to understand tax obligations to your home country. If one is not a citizen but a green card holder and needs to know whether they qualify as a resident for tax purposes, they need to consult the IRS Substantial Presence Test. According to U.S. law, irrespective of whether you’re contracting as a freelancer or employee, you’ll pay the applicable expat taxes. This rule applies even if you’re paying taxes in the country where you’re residing. If you aren’t quite sure about how to file returns, it is advisable to contact a tax consultant who can help. Here’s an overview of what to expect.
Understanding the Difference Between an Expat Freelancer and Employee
An expat freelancer is a professional who is working as an independent contractor or as a sole owner and proprietor of an unincorporated business in a foreign country. However, an expat employee is engaged by a company in a foreign country and earns regular wages. In both cases, the US taxes all income earned. However, there are key differences in how you’ll calculate the applicable dues.
Income Tax Depends on Your Status as a Resident in the Host Country
Different countries have their laws about taxing foreign nationals working and living on their soil. For instance, Dubai does not levy any income tax or capital tax. As a result, you’re exempted from any dues. On the other hand, if you’ve been living and working in Singapore for at least 183 days, you’ll have resident status and pay income taxes similar to the citizens of the country. However, if you’re a non-resident and filing taxes in Singapore as a US expat, the taxation stands at 15% of the wages you earn.
France has similar laws for any foreign citizens owning a permanent residence or living for more than 183 days in the country. Such expats are considered residents and must pay the applicable income taxes. You’ll also follow the financial year determined by that country. For instance, France has a fiscal year starting on January 1 and ending on December 31 for all taxation purposes.
Foreign Earned Income Exclusion
If you’re an American expat residing overseas for more than 330 days out of a 365-day period, you can complete and submit Form 2555 or 2555-EZ. This form entitles you to Foreign Earned Income Exclusion (FEIE) in accordance with Section 911 of the Internal Revenue Code. Citizens and Green Card holders qualifying under the exclusion rule can deduct up to $105,900 of the income they earned abroad from the expat taxes they must pay in 2019. However, if you’re paying taxes for 2018, you’ll deduct a total of $103,900 from the income you earned.
Expat individuals working as employees of a foreign employer need not pay Social Security and Medicare taxes that they would normally pay in the US. By completing the FEIE, you can exclude the entire income you earned during the fiscal year. Any taxes you must pay will only be to the host country where you live. Do keep in mind that you must fulfill certain conditions to qualify for Foreign Earned Income Exclusion.
Selling a Business in the USA will inquire about taxes at all times
Irrespective of whether you would qualify for exclusions, if you are selling a business in the USA and plan to retire abroad, you will still need to pay applicable state and federal taxes. In the case of selling a manufacturing business, for example, profit made from the sale of the assets will be taxed as capital gains. Any consulting fee received at the moment of the sale will be taxed as income only.
Independent Contractors Must Pay Self Employment Tax
If you’re earning an income as a freelance contractor, you’ll pay taxes on that income irrespective of whether you’re working on American soil or abroad. Self-employment taxes include social security and Medicare taxes that would have applied to an employer if you had been holding a job. As per taxation laws, a part of the social security and Medicare taxes are paid by the employer by reporting wages on a W-2. In essence, freelancers pay double the tax. Dual tax liability ensures that expats are covered under the benefits offered by the US Social Security system even if they are not working or have business operations in their country.
How the Totalization Agreement Affects Your Taxes
At the time of filing your taxes, you’ll want to take into account the Totalization Agreement that the US has with your host country. If you’re a contractor residing in a country that has an agreement with the US, you can get an exemption from the self-employment tax. You’ll only pay taxes in the foreign country and the FEIE will allow you to avoid paying social security in two different locations. The Totalization Agreement is also intended to ensure benefits protection for workers who have chosen to divide their careers between the US and any other country.
When you’re living and working abroad and earning an income, understanding how taxation laws work can be confusing. A wise option is to consult expert tax professionals for the right guidance. You’ll remain compliant with the regulations in both countries and avoid the possible complications arising out of a tax audit.
