US Taxes for Freelancers Working Abroad: What You Still Owe

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If you are a US citizen or resident alien, freelancing from another country does not end your US tax duties. You generally still file a US return on your worldwide income, but tools like the foreign earned income exclusion and the foreign tax credit can lower what you owe. This is general information, not tax advice, and a tax professional who works with expats is worth asking.

Do you still file US taxes if you work abroad?

Yes, in most cases. The IRS explains in its page for US citizens and resident aliens abroad that you follow the same filing rules as people living in the US, and that your worldwide income is taxable. Whether you must file depends on your income and filing status, so check the current thresholds each year.

The same goes for freelancers who rent a desk in a coworking space in another country. Where you sit does not change your US obligation.

Which forms does a freelancer abroad usually use?

• Form 1040: the main individual return.
• Schedule C: where a sole proprietor reports freelance income and business expenses.
• Schedule SE: calculates self-employment tax on net earnings.
• Form 2555: claims the foreign earned income exclusion.
• Form 1116: claims the foreign tax credit.

What is the foreign earned income exclusion?

The foreign earned income exclusion lets qualifying people leave part of their foreign earned income out of US income tax. The maximum amount is adjusted each year, so look up the current figure rather than relying on an old article.

To qualify, you need a tax home in a foreign country and one of two tests:

• Bona fide residence test: you are a genuine resident of a foreign country for an uninterrupted period that includes a full tax year.
• Physical presence test: you are physically in a foreign country for at least 330 full days in any 12 consecutive months.

Time spent back in the US counts against the physical presence test, so keep a simple log of your travel dates.

Does the exclusion remove self-employment tax?

No, and this is a common mistake. The exclusion reduces income tax only. As a freelancer you generally still owe self-employment tax (Social Security and Medicare) on your net earnings, even on income you exclude. Some countries have a totalization agreement with the US that can change this, so ask a professional about your situation.

How does the foreign tax credit work?

If you pay income tax to the country where you live, Form 1116 can give you a credit against your US tax on the same income. That helps avoid being taxed twice. You generally cannot claim a credit for foreign tax paid on income you have excluded, so decide which method fits better. For many people with higher foreign tax rates the credit is the better choice, but it depends on your numbers.

What can a freelancer deduct?

Ordinary and necessary business costs lower your net profit on Schedule C. Typical examples are software and subscriptions, equipment, internet, coworking membership fees, professional training and business travel. If you use part of your home exclusively and regularly for work, a home office deduction may apply.

Keep receipts and a simple record of income and expenses all year. For tips on tracking spending, see our post on expense tracking apps for location-independent work.

Do you pay estimated taxes?

Usually yes. No tax is withheld from freelance payments, so you generally pay estimated tax in installments. The standard due dates are April 15, June 15, September 15 and January 15 of the next year, moved to the next business day when they fall on a weekend or holiday. If you expect to owe, set money aside from each invoice.

What are the deadlines for people living abroad?

US citizens and resident aliens whose main place of work is outside the US generally get an automatic extension until June 15 to file a calendar-year return. This is an extension to file, not to pay. Interest still runs on tax unpaid after April 15. You can request more time, to October 15, with Form 4868 before the June 15 date. Details are in the IRS Publication 54.

Do you need to report foreign bank accounts?

Possibly. If the total value of your foreign financial accounts goes over $10,000 at any time during the year, you may have to file an FBAR. The IRS explains the rule on its FBAR page. There may also be other reporting rules for foreign assets, which is one more reason to get advice.

When should you hire a tax professional?

Ask an adviser who specialises in US expat taxes if you:

• earn in more than one country or through a foreign company;
• are unsure which residence test you meet;
• pay foreign income tax and are deciding between the exclusion and the credit;
• have foreign accounts or a foreign business.

A one-off consultation before filing is often cheaper than correcting a return later. For help setting up a workspace while you work out the rest, see our portable home office kit guide, and browse MaviGadget's best travel gadgets for useful accessories.