If you are an American working outside United States in a U.S. company, it is most likely that your employer will deduct the taxes for your Expats Medicare and Social Security to your W-2 income. However, if you live in one of the 20 or so countries where the United States has a Social Security Treaty in place, you can choose to pay your Social Security and Medicare taxes in that country instead of having those taxes withheld against your pay.
In the case that you are an employee of a foreign company, you are under that country’s tax law which means that you are not required to pay a Social Security Tax in the United States. It is necessary to do some research on the tax law of the specific country where you are employed in order to avoid tax penalties and endanger your employment or business in that country.
If you are living outside United States as an independent contractor or a self-employed person, you should pay a self-employment tax which covers both an employer and an employee’s Medicare and Social Security Taxes. This means that along with your US Income Tax Return, you must also file a Schedule C and Schedule S-E to cover both ends.
The tax rate for self-employed US citizens overseas is 15.3% of the Schedule C inclusive of the foreign income. The amount of the foreign tax credits does not affect the self-employment rate. The net earnings of expats are defined as any money or income that is left after all of the expenses in running the business such as salary & wages, operational & representational costs and miscellaneous expenses are deducted. It covers earnings made not only in the United States but earnings made overseas as well.
The topic of expats and Medicare, self-employed taxes and social security is quite complicated and impacts how your taxes are calculated and filed. Kathleen M Egan CPA PLLS works with expats on maintaining compliance and gaining the highest tax advantage on a daily bases. Kathleen and her team of experts are ready to help you with your questions.