Self-Employment Tax Abroad: Totalization Agreements by Country

Do US expats pay self-employment tax when the foreign earned income exclusion wipes out income tax?

Yes, in most cases. A self-employed US citizen or resident alien living outside the US pays US self-employment tax on net earnings of $400 or more, and the foreign earned income exclusion cannot reduce those earnings (IRS: Schedule SE instructions; Publication 54, chapter 3). The foreign tax credit does not help either: it reduces US income tax, not self-employment tax (IRS: Publication 514).

Self-employment tax is Social Security and Medicare for people who work for themselves, figured on Schedule SE. It is 15.3% of net earnings, which are 92.35% of net profit: 12.4% for Social Security, up to the $184,500 wage base, and 2.9% for Medicare, with no cap. A further 0.9% Additional Medicare Tax applies once self-employment income plus any Medicare wages passes $200,000 for a single filer ($250,000 joint) (IRS: Schedule SE instructions).

The one way out is a totalization agreement: an agreement between the US and another country so you pay social security to one country, not both. Three facts decide your case:

A case is not simple when you paid into both systems for past years, moved during the year, cannot get a coverage statement, run the work through a company, or rely on a spouse's coverage. Gather your local social security registration, contribution statements, any coverage certificates, and your filed Schedules C and SE.

For whether you need to file at all and the exclusion in outline, see filing while living abroad. Living in Canada is handled in US self-employment tax or CPP.

Which countries have a US totalization agreement?

The Schedule SE instructions list 30 countries with a US social security agreement (IRS: Schedule SE instructions):

New agreements are added from time to time. The IRS points to the Social Security Administration's international programs site (ssa.gov/international) for the current list and the text of each agreement (IRS: Totalization agreements).

What if my country is not on the list, such as Mexico, New Zealand, Colombia or China?

Without an agreement, nothing removes the US tax: US self-employment tax generally applies to net earnings of $400 or more, and the local system charges under local law (IRS: Schedule SE instructions). Hong Kong, Taiwan, Singapore and India are not on the list either.

The exclusion or the credit can still remove US income tax; that choice is covered in foreign earned income exclusion or foreign tax credit. Whether a foreign social contribution can be credited against US income tax depends on the levy; see the foreign tax credit limit and which payments count. No credit or deduction is allowed for social security tax paid to an agreement country (IRS: Publication 514). The IRS names one carve-out: France's CSG and CRDS are not covered by the US–France agreement, so it will not challenge a foreign tax credit for them on that ground (IRS: Totalization agreements).

Under a totalization agreement, which country covers a self-employed person?

Generally the country where you live. The IRS says that under these agreements you generally pay social security and Medicare taxes only to the country in which you live, and that self-employed people subject to dual taxation are covered only by the system of the country where they reside (IRS: Schedule SE instructions; Publication 54, chapter 3).

The US exemption reaches self-employment income only to the extent the agreement makes it subject exclusively to the foreign system (26 U.S.C. 1401(c)). The IRS's general test is where you live, not where your clients are.

Each agreement has its own self-employment article, with its own tie-breakers for people who live in one country and work in the other. Read the article for your country on the Social Security Administration's agreement pages before relying on the general rule, especially if you split the year between two countries.

Certificate of coverage: who issues it, and how do I show the exemption on my US return?

A certificate of coverage is the statement proving which country's system covers you; the social security agency of the country you live in issues it. The IRS wants a statement from the appropriate foreign agency verifying that your self-employment income is covered by that country's system. If the foreign country will not issue one, the Schedule SE instructions send you to the Social Security Administration's Office of Earnings and International Operations, which runs an online certificate of coverage service (IRS: Schedule SE instructions).

To claim the exemption on Form 1040:

1. Do not complete Schedule SE for the exempt income.
2. Attach a copy of the foreign agency's statement.
3. On Schedule 2, line 4, check box 3. The Schedule SE instructions say to enter "Exempt, see attached statement"; the Form 1040 instructions say to enter "EAS" (IRS: Form 1040 instructions). Use the wording in the Form 1040 instructions for the year you file.

Keep reporting the business income for income tax, usually on Schedule C. The statement removes self-employment tax only, but all of it: the Social Security and Medicare parts alike (26 U.S.C. 1401(c)).

Schedule SE is also how the Social Security Administration records your earnings for benefits (IRS: Schedule SE instructions). Income left off it generally does not add to your US earnings record; ask the Social Security Administration how your agreement counts that period for benefits.

The reverse case also exists: if an agreement keeps you in the US system, the Social Security Administration's certificate establishes your exemption from the foreign social security tax (Publication 54, chapter 3).

I'm not registered or paying into the local system: can I still get a certificate?

Probably not, and the exemption may not apply. The foreign statement must verify that your self-employment income is covered by that country's system, and the US exemption reaches only income the agreement places exclusively under the foreign system (IRS: Schedule SE instructions; 26 U.S.C. 1401(c)). If the local system does not cover the income, there is nothing for its agency to certify, and the US tax generally stays.

The IRS sources do not address these borderline cases directly. Ask the foreign agency in writing what it can certify for your dates, keep its answer, including a refusal, and then use the Social Security Administration route if the agency declines.

If I work for a local company as an employee, does US Social Security tax still apply?

Generally no. US Social Security and Medicare tax does not apply to wages for work done abroad as an employee unless an American employer pays you, an agreement assigns your job to the US, your local employer is a foreign affiliate of a US company (at least 10% owned by it) that extended US coverage on Form 2032, or you work on an American vessel or aircraft (Publication 54, chapter 2; 26 U.S.C. 3121(b); IRS: Social security tax consequences of working abroad). Local contributions follow local law. Wages are not self-employment income, so Schedule SE does not apply to them (26 U.S.C. 1402(c)(2)). If the local company is your own, see LLC, S corporation or local company while living abroad. If your employer is a US company, see working abroad for a US employer.

Paid US self-employment tax and foreign social security twice: how do I get it back?

File Form 1040-X for each year, with the foreign coverage statement for that year. A refund claim generally must be filed within 3 years after you filed the original return or 2 years after you paid the tax, whichever is later. A return filed early counts as filed on the regular due date (generally April 15); one filed under an extension counts from the day the IRS received it. Estimated tax counts as paid on the regular due date. Even inside the window, the refund is capped at tax paid in the lookback period: the 3 years before the claim, plus any filing extension, when you claim within 3 years of filing; otherwise the 2 years before the claim (IRS: Form 1040-X instructions). A late original return with earlier estimated payments can leave some tax outside it. Years outside the window generally cannot be refunded.

Steps for each year:

1. Confirm the foreign system covered your self-employment income for that period, and get a statement naming those dates.
2. Remove the self-employment tax and add the Schedule 2, line 4 entry described above.
3. Remove the deduction for half of the self-employment tax. That raises adjusted gross income, which can raise income tax, so the refund may be smaller than the tax removed.
4. Check Additional Medicare Tax: the Form 1040-X instructions say you may need to attach a corrected Form 8959 when self-employment income is adjusted.
5. Explain the change in Part II of Form 1040-X (IRS: Form 1040-X instructions) and attach that year's foreign agency statement, the evidence the Schedule SE instructions ask for (IRS: Schedule SE instructions).

Waiting for a statement does not extend the refund deadline. If the oldest year's window is closing, ask a preparer what a claim for that year needs before it lapses. Once filed, see amended return status and timing. If you never filed for some years, start with the Streamlined Foreign Offshore Procedures.

Example

These examples are illustrative; all figures are in US dollars.

A designer in Germany, an agreement country

A US citizen lives in Germany and freelances, with US$60,000 of net profit. In this example she is registered with the German pension system, so the German agency can state that German law covers her self-employment income; the statement shows which country's law applies, not how much she paid. She asks for a statement covering the year, attaches it to her Form 1040, skips Schedule SE, and makes the Schedule 2, line 4 entry. Her income tax is still handled by the exclusion or the credit.

A consultant in New Zealand, not an agreement country

A US citizen lives in New Zealand all year, qualifies for and claims the foreign earned income exclusion, and has US$50,000 of net profit and no other income. The exclusion removes all her US income tax. Self-employment tax still applies: US$50,000 × 92.35% = US$46,175 of net earnings × 15.3% = about US$7,065.

A freelance teacher in Spain who paid twice

A US citizen teaches English freelance in Spain and paid Spanish social security on that income for two years. Each US return also carried about US$3,000 of self-employment tax.

• First year: once the Spanish agency issues a statement for that year, she files Form 1040-X inside that year's refund window.
• Second year: a separate Form 1040-X with the second year's statement, inside its own window.
• Each refund may come out a little under US$3,000 if removing the self-employment tax deduction raises her income tax.

Different for you?

• You live in Canada: see US self-employment tax or CPP for Americans in Canada.
• You paid into both systems for several years, or the agency will not issue a statement: the refund window and the evidence decide what can be recovered; get cross-border tax help.
• You moved between countries during the year, or live in one country and work in another: coverage can change under the agreement's own article; get cross-border tax help.
• You work through an LLC, S corporation or local company: see LLC or S corporation while living abroad.
• You need to choose the exclusion or the credit for income tax: see foreign earned income exclusion or foreign tax credit.
• You are an employee of a US company working abroad: see working abroad for a US employer.
• You never filed some years: see the Streamlined Foreign Offshore Procedures.