U.S. TAX INFORMATION FOR SELF-EMPLOYED

American citizens living abroad who operate their own business as sole  proprietors are subject to U.S. Income Tax on the net income  from that business. They must file a U.S. Income Tax Return if they have $400 or more net  earnings from self-employment even if that income is excludible as foreign  earned income. The income and expenses of the business are reported on Schedule  C (Profit or Loss from Business). This income will qualify for the foreign earned income exclusion of $91,500 if your business is located in a foreign country and you are either a bona fide resident or meet the physical presence 330 day test. (Form 2555).

In addition to U.S. Income Tax the business  owner you may also be subject to U.S. Self-Employment Tax. This tax is computed on the profit from the business without any deduction for the foreign earned income exclusion. The self-employment tax includes both the employer and the employee portion of the Social Security and Medicare taxes and is computed on Schedule SE.(Form 1040).

In some cases there is an exemption from U.S. Self-Employment Tax. If your business is located in a country with which the U.S. has a Social Security Agreement (known as a Totalization Agreement) you will only be subject to Social Security tax in one country. You can inquire at the Social Security office at your U.S. Embassy and ask if the country in which your business is located is covered by a Totalization agreement. If so, you should obtain a certificate of coverage from your country of residence which will exempt you from the U.S. tax.

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