US Self-Employment Tax and CPP: What If You Paid Both?

Do I pay US self-employment tax as well as CPP or QPP if I live in Canada?

Generally no, where Canadian coverage applies. Under the Canada–US social security agreement, a US citizen who is self-employed and resident in Canada is assigned Canadian coverage: CPP (Canada Pension Plan) in every province and territory except Quebec, and QPP (Quebec Pension Plan) in Quebec, under the separate Quebec–US agreement. The agreements then exempt the same work from US self-employment tax (SSA: coverage for self-employed workers, Canada.ca: CPP contributions).

The exemption is not automatic. Schedule SE is otherwise required once net earnings from self-employment reach US$400, so a US return prepared without the exemption statement generally includes the tax, which is one way people end up paying both (IRS: Schedule SE instructions). The IRS wording covers US citizens and resident aliens living outside the United States, so green card holders in Canada are within it (IRS: Form 1040 instructions).

For the wider question of filing income tax returns in both countries, see Americans living in Canada.

What proof does the IRS want, and where does it go on my US return?

The IRS wants a statement from the appropriate foreign agency verifying that your self-employment income is covered by that country's social security system. The CRA and Retraite Québec call their version a certificate of coverage; this page says coverage statement for either. For Canadian coverage, self-employed workers attach a copy to their US return every year (IRS: Schedule SE instructions, SSA: Canadian certificates). If your US return software asks for a certificate of coverage, it generally means this statement.

If your self-employment income is exempt, the currently published Schedule SE instructions say to:

1. Attach a copy of the coverage statement to Form 1040.
2. Do not complete Schedule SE.
3. On Schedule 2, line 4, check box number 3 and enter Exempt, see attached statement.

The Form 1040 instructions instead say to enter EAS beside box 3 (IRS: Schedule 2 instructions). Check the instructions for the return year you are filing. The Schedule SE instruction speaks of exempt self-employment income and does not say how to treat income that is only partly covered by Canada. If part of your income may still fall under US coverage, have the split reviewed before omitting Schedule SE.

The exemption removes US self-employment tax, which is the social security and Medicare tax on self-employed earnings (IRS: Publication 54). It does not remove US income tax, so keep reporting the business income on the appropriate US income tax schedule; for a sole proprietor, that is generally Schedule C (IRS: Form 1040 instructions).

Who issues the certificate: the CRA, Retraite Québec or Social Security?

The agency responsible for the coverage assigned to the work issues the statement: the CRA for CPP, Retraite Québec for QPP. Both describe their certificates for temporary work abroad, so if you live and work only in Canada, read the next section before you apply.

Sources: CRA: CPT56, CRA: how to apply, Retraite Québec: forms, IRS: Schedule SE instructions, IRS: Publication 54.

I work only in Canada. Why do the certificate pages talk about temporary work abroad?

The Canadian application pages are written for temporary foreign assignments, which can leave a Canadian-only freelancer without an ordinary route. The CRA's circular says Canada will not normally issue CPP certificates to residents of Canada for work done in Canada or for US visits of 6 months or less (CRA: IC84-6, paragraph 9).

The same circular says the self-employed rule will primarily affect self-employed US citizens who reside in Canada (paragraph 6), and Form CPT56 is described as for employed and self-employed persons, though the form itself asks for the foreign business and an expected period of work there (CRA: CPT56). Yet the CRA's eligibility page describes a self-employed Canadian resident temporarily working outside Canada, and Retraite Québec a self-employed worker with a temporary contract abroad. None of these pages says how a person working entirely in Canada obtains the statement the IRS requests (CRA: who can apply, Retraite Québec).

What to do, in order:

1. Contact the CRA's Social Security Unit (CPP) or Retraite Québec's BESS (QPP); the CRA's how-to-apply page lists its contact routes. Say that you live in Canada, work only in Canada, are self-employed and need a statement for the IRS that your self-employment income is covered for the years you name. Describe the work as it is.
2. Have ready your Canadian business return, Form T2125, CPP or QPP records, residence and work dates, and any prior certificates.
3. Keep the agency's answer, including a refusal.
4. If the agency declines, contact the Social Security Administration, as the Schedule SE instructions direct. Say that the Canadian agency declined and that you need proof supporting exemption from US self-employment tax (IRS: Schedule SE instructions, IRS: Publication 54, SSA: certificate service).

Neither agency's published guidance promises a certificate for this situation.

Can I request proof before my first CPP payment, or for a year already filed?

Neither the CRA nor Retraite Québec says a first CPP payment is required, and neither promises a certificate for a year already filed. The IRS asks for confirmation of coverage for the income concerned, so ask the issuing agency what it can certify for your dates (IRS: Schedule SE instructions). Self-employed CPP is worked out on the Canadian return, so in a first year you may have paid no CPP yet when the US return is due (CRA: line 22200).

For eligible temporary work abroad, the CRA says to apply as soon as you know about the assignment, which does not settle the Canadian-only situation (CRA: how to apply).

For a past return, name each period you need verified and say that the statement will support a US amendment. Check the dates on any certificate: the CRA says it shows its period of validity, so one covering current work does not necessarily cover an earlier return.

Keep the US refund deadline under review while the agency considers the request; a certificate request is not a refund claim (IRS: Form 1040-X instructions). A refund claim must state each ground and its facts under penalties of perjury (26 CFR 301.6402-2(b)(1)); ask your preparer whether to file before the statement arrives.

I already paid US self-employment tax or estimates. How do I get it back?

If a filed US return charged self-employment tax on income exempt under the agreement, the correction generally goes on Form 1040-X with the coverage statement. Estimated payments made before filing are handled as payments on the original return, so making estimates alone does not mean an amendment is needed (IRS: Form 1040 instructions, Form 1040-X instructions).

Before preparing an amendment:

1. Confirm which system covered the work for that return's period.
2. Pull your filed Form 1040 with Schedules C, SE, 1 and 2, the payment records and any IRS adjustments.
3. Remove the exempt self-employment tax, which sits in the other taxes total on Form 1040-X, line 10. If all of the self-employment income is exempt, omit Schedule SE from the corrected return, make the Schedule 2, line 4 entry described above, add the coverage statement, and in Form 1040-X's explanation of changes state the agreement exemption and the period covered.
4. Recalculate the deduction for the deductible part of US self-employment tax. That deduction comes from Schedule SE; it cannot remain unchanged when the corresponding tax is removed, and its removal changes adjusted gross income on Form 1040-X, line 1 (IRS: Schedule 1, line 15).
5. Recheck the resulting income tax, any affected deductions and credits, any state return, and Additional Medicare Tax: the Form 1040-X instructions say you may need to attach a corrected Form 8959 when self-employment income is adjusted (IRS: Form 1040-X instructions).

File a separate Form 1040-X for each year. It can be filed electronically with tax filing software. A paper amendment from a foreign address goes to the Internal Revenue Service, Austin, TX 73301-0215, unless you are replying to a notice, which gives its own address; check the Where To File table before mailing. Place a completed, updated Form 1040 behind Form 1040-X, then the new or changed schedules and supporting statements, not a copy of the original return (IRS: Form 1040-X instructions).

What is the refund deadline?

Two limits apply to each year's refund claim. A return filed early counts as filed on its due date. Extensions, disaster postponements and periods when a physical or mental impairment keeps you from managing your financial affairs can change the dates (IRS: Form 1040-X instructions, IRS: Publication 556).

Do not assume the entire US self-employment tax becomes the refund: removing its deduction can change income tax. A claim for more than the correct amount can bring a penalty of 20% of the disallowed amount unless there was reasonable cause (IRS: Form 1040-X instructions). If several years need amending or a deadline is close, cross-border tax can review the filings.

The IRS wants a CPP certificate before processing my refund. What do I send?

A response to an IRS request for coverage proof generally includes the agency-issued statement for the period in the claim, plus whatever the letter asks for. A record of CPP payments is not the agency statement the Schedule SE instructions describe, and the IRS decides what it accepts. Follow the letter's deadline and submission instructions (IRS: Schedule SE, IRS: responding to a notice).

Tie the statement to the claim: name the return year, the business activity, the certificate's coverage dates and the self-employment tax change, and include any corrected forms the IRS asks for. Keep copies of the response and its delivery record.

If the statement is still unavailable, use the letter's contact route to tell the IRS the request is pending; do not assume that replaces the statement or extends a deadline. For the notice response itself, see Answering an IRS letter while living in Canada.

Can I claim a US credit or deduction for CPP, and does the income exclusion help?

The IRS disallows a credit or deduction for social security taxes paid to a foreign country with a US social security agreement. CPP or QPP contributions therefore should not be treated as Canadian income tax for the US foreign tax credit or substituted for the US self-employment tax deduction (IRS: Publication 514).

The foreign earned income exclusion does not reduce earnings used to calculate US self-employment tax. The coverage exemption, when applicable and supported, addresses that tax (IRS: Publication 54, effect of exclusion).

Canadian income tax is a separate question; for the credit-versus-exclusion decision, see Americans living in Canada. For Canadian reporting, contributions and instalments, see How self-employed income is taxed.

Do US client visits or short US rotations change which system covers me?

For genuine self-employment, residence generally determines coverage under the Canada–US agreement, including when work occurs on both sides of the border. A US client or a short US contract does not by itself replace that residence rule, but moving your home out of Canada can, because US Social Security covers a self-employed person who is not a resident of Canada (CRA: IC84-6, paragraph 6).

If one country treats an activity as employment and the other as self-employment, the self-employment rule applies only when you live in the country that treats it as self-employment; otherwise the employment rules apply (CRA: IC84-6, paragraph 7). If where you live is uncertain, you may request a ruling from the authorities of the country you claim as your residence (CRA: IC84-6, paragraphs 10 and 11).

For employee work, including which of US Social Security and Medicare or CPP applies, see Working across the border. For the income tax and state tax treatment of short medical assignments, see Short US contracts for nurses and doctors living in Canada.

Example

Illustrative figures only, in US dollars. A US citizen consultant lives and works in Ontario, has about US$42,500 of net business profit and paid Canadian CPP. Assume Canadian coverage is confirmed for the full period and the filed US return mistakenly included about US$6,000 of self-employment tax and the matching deduction of about US$3,000.

The corrected return keeps the business profit, removes the self-employment tax and removes the related deduction. Removing the deduction raises taxable income by about US$3,000, and whether that adds US income tax depends on the rest of the return, including any foreign tax credit. The consultant recalculates income tax and any affected credits before requesting a refund on Form 1040-X with the coverage statement, so the refund is not automatically US$6,000. If the return was filed on its April due date, the claim is generally due three years after that date, and tax paid through estimates counts as paid on it.

Different for you?

• Several filed years, missing proof or an approaching refund deadline: use cross-border tax; gather filed returns, amendments, estimated-payment records, CPP or QPP statements, T2125 forms, work dates and agency correspondence.
• US returns were never filed: see Catching up on missed US returns.
• The IRS sent a request, proposed adjustment or denial: see Answering an IRS letter while living in Canada.
• Your Canadian business operates through a corporation: see American owners of Canadian corporations.
• You moved between the countries this year: coverage follows where you live, so the answer can change; see Moving from the US to Canada or Moving from Canada to the US.
• A US company pays you as an employee, or the two countries classify your work differently: see Working across the border.
• You need a QPP statement for Canadian-only work or a ruling on residence: use cross-border tax to review the coverage question and evidence.