Unlike the rat race in a 9-to-5 job, freelancing touts the work-life balance that digital nomads aspire for. Since you have more freedom in project or client selection, you also have greater control over various work-life aspects, including your schedule and finances.
Understandably, you’ll want to opt for manageable and less stressful but good-paying freelancing jobs, so you have the time and resources to live life to the fullest. Just be ready to juggle traveling and working while keeping track of your tax obligations.
Regardless of which non-U.S. geographical location(s) you choose, you must pay U.S. expat taxes, raising the question of how to file taxes as a freelancer in a foreign country.
This post will walk you through the important steps in filing taxes promptly and properly to help you stay clear of costly tax issues.
Choose the correct business entity
The IRS considers freelancers as self-employed, so you must file your tax return as a business owner or an independent contractor with a Schedule C.
Under this default classification, you may not enjoy the same tax benefits afforded to other business types, such as S-Corporations, using applicable tax strategies to help them recover from losses. But, the law requires you to choose the correct corporate structure so you will be taxed correctly.
Tax form Schedule C applies to expat freelancers working with one or more companies and earning $400 or more after deductions or expenses that do not have a business entity organized that is separate from the individual taxpayer.
Pay self-employment tax
As long as you’re receiving wages, salaries, and other income types, you must pay personal income tax on your earnings not covered by exemptions or deductions. If you’re a self-employed expat, additional taxes go on top of your tax contributions. In short, you should expect to pay both personal income and self-employment taxes.
In the case of the latter, the rate is 15.3%. Out of that, 12.4% goes to Social Security insurance while 2.9% goes to Medicare insurance.
In line with these changing requirements, consulting a tax resolution specialist is advisable for accurate reporting and payment of freelancer tax.
Quarterly estimated taxes
Similar to how employers are responsible for submitting payments to the IRS each time they withhold taxes from employee paychecks, you must also make quarterly—not yearly—tax payments from your income as a freelancer abroad if you expect to owe at least $1,000 come tax season.
Here, you’ll need to estimate your taxes using IRS-provided tools, such as Form 1040-ES or Estimated Tax for Individuals.
Don’t worry if you get your estimates wrong, as you’ll have a chance to amend them during the annual tax return filing. But ideally, by December, you should have paid 90% of your taxes for the year or the equivalent of 100% of your tax bill from the previous year; otherwise, you may face penalties.
Quarterly estimated tax payments are typically due every April 15, June 15, and September 15 of the current year, and January 15 of the following year.
Minimize taxes through business deductions
Under U.S. tax laws, self-employed expats are entitled to applicable business deductions. You can reduce your tax bill by claiming deductions or exemptions since your actual or net profit is also lower.
Below are the different tax deductions available to self-employed expats:
- Home office – You’re probably working from home and incurring expenses on rent or mortgage, utilities, and essential services to make your space conducive for work. Then, you can deduct a portion of your home office expenses from your tax bill.
- Travel and meals – Should you need to pay for accommodations and meals when you go on business trips, you can file those as tax deductions, too.
- Transportation – Whether you take the bus, book a ride-hailing service, or use your car, the money you pay for your daily ordinary and necessary business travel (not commuting) can be deducted from your self-employment income.
- Education and certification – From books and magazines to training courses, these materials are considered business expenses that you can subtract from your income to lower your tax obligations.
- Equipment and supplies – These pertain to your computer usage, phone or internet subscription, software purchase, and office supplies replenishment, among others—all of which you can include as part of your business expenses and, thus, deductions.
- Marketing – If you promote your freelance services either through flyers and business cards or via your website and social media, you can claim deductions for any marketing or branding-related costs.
- Health insurance – Your medical and dental insurance premiums may also count as business deductions.
Know Your Tax Duties and Benefits as a Self-Employed Expat
Living and working as a freelancer in a foreign land does have a lot of perks from a professional, financial, and even personal perspective. But at the same time, you must not forget about your legal obligation for paying U.S. taxes.
With the tips above, you can be more knowledgeable about tax rules for expat freelancers and digital nomads. You can also hire a tax professional at Tax Samaritan. We specialize in tax resolution services for expats, having helped American taxpayers since 1997.