US citizens and greencard holders are taxed in the United States on their worldwide income, regardless of where they live. Freelance income is reported in gross (total receipts) on a Schedule C, Profit or Loss from Business (Sole Proprietorship). On the Schedule C, you also get to deduct “ordinary and necessary” expenses related to this work. You will then be taxed on your net income, which is gross income minus allowable expenses.
You likely can avoid some or all of the U.S. income tax on this income, either through foreign tax credits (taxes paid to your resident country on this same income) or the foreign-earned income exclusion (by satisfying one of two residency tests). However, because you are operating as a “business” you net income from this business is also potentially subject to U.S. self-employment tax. The self-employment tax is rate is currently set at 15.3%. The rate consists of two parts, 12.4% for social security tax and 2.9% for Medicare.
When you work as a waged employee for a company, a portion of the social security and Medicare tax is paid by your employer and a portion by you. When you operate as a freelancer, or self-employed, you are acting as employer and employee. So, you are responsible for the self-employment tax on your net income calculated on your schedule C. Foreign tax credit and the foreign-earned income exclusion cannot be used to offset U.S. self-employment tax due. The only way to exclude the self-employed income of a U.S. citizen or greencard holder from U.S. self-employment tax is through the application of a totalization agreement.
The US has entered into totalization agreements with several countries. If there is a totalization agreement in place between the U.S. and your country of residence, your business net income may not be subject to US Social Security taxes. To exempt the income from U.S. self-employment tax, you will need to be registered as a self-employed in your resident country. You also will likely need to obtain a certificate of coverage from the tax authority in your resident country. If there is not a totalization agreement in place with your resident country, then you will owe U.S. self-employment tax on your Schedule C net income.
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult tax, legal and accounting advisors before engaging in any transaction.