US Citizen Working as an Independent Contractor Abroad -- Payroll Taxes?

Question

I am a US citizen who has been a foreign resident for years. I have recently gotten a job as a consultant for a US company. I will be doing the work in Japan, but will be paid to a US account that I have from prior to leaving the country.

I read this article about 'US Self-Employment Tax' saying:

If you are self-employed, however, acting as an independent contractor, then you must file a Schedule C with your U.S. Tax return and pay the appropriate U.S. payroll taxes on your net earnings. The self-employment tax rate is 15.3% and the foreign income exclusion mentioned before does not reduce this liability.

In Japan as someone who is self-employed I have to pay for pension and other expenses individually. Japan and the US have a tax treaty that is supposed to prevent double taxation for this sort of thing. If I intend to pay the social security in Japan, do I still need to pay this payroll tax, and if not, how do I inform the IRS not to hassle me about this? Not expecting a tax consultation, but would like to at least be pointed in the right direction.

Answer 1

Tax treaty doesn't generally cover FICA, only income taxes. Self-employed US citizen will pay payroll taxes (Schedule SE on your tax return) regardless of residency unless a totalization agreement exists.

There are much less countries that have a totalization treaty with the US than those who have income tax treaties.

Japan does seem to have a totalization agreement with the US, so you should check what are the rules specifically for US citizens self-employed while being Japanese residents. I suggest talking to a tax adviser (US-licensed EA/CPA) who's familiar with the tax and totalization agreements the US has with Japan.

Answer 2

I am in a similar situation, a US citizen working full-time in the UK. As far as I am aware the IRS requires you to file an annual tax return that includes ALL your income, whether that is earned in the USA or overseas. All foreign income up to "somewhere around" $80,000 (I forget the exact figure) is exempt from US tax, however above that it's possible that you might have to pay the IRS as well as having paid tax in Japan, probably just the excess (or zero if tax in the USA is less?).

I tried to figure out the forms on my own the first year and got into a horrible mess. I thought I was due a $1,000 refund, the IRS said I owed $700. By the time the demands for money from the IRS came through the mail (6 weeks) the money was already well overdue and I spent the next 6 months trying to resolve the problem.

Now I prepare details of my earnings and send them to the accountant I used to use in Indiana. She prepares the forms, charges me a small fee, and eliminates a LOT of stress and hassle.

Answer 3

As littleadv's answer says, double-liability for social security taxes is not covered by a regular tax treaty but by a separate "totalization agreement". The US and Japan have such an agreement. From the IRS instructions for Form 1040 Schedule SE (as of 2019, emphasis mine):

If your self-employment income is exempt from SE tax, you should get a statement from the appropriate agency of the foreign country verifying that your self-employment income is subject to social security coverage in that country. If the foreign country won't issue the statement, contact the SSA Office of International Programs. Don’t complete Schedule SE. Instead, attach a copy of the statement to Form 1040 or Form 1040-SR and enter “Exempt, see attached statement” on Schedule 2 (Form 1040 or 1040-SR), line 4.

The US Social Security Administration has more details for each country with a totalization agreement explaining how to get the foreign country's statement, which you will submit with Form 1040 instead of Schedule SE.

Answer 4

If you are a self-employed American in Japan, and you are in the Japanese pension system, you need to request a form "J/USA 6" from your local Japanese pension office to be exempt from Social Security taxes and related filing requirements. They will likely not be familiar with the process and you'll need to follow up with them repeatedly. You will also need to paper file your US taxes to submit the form.

An example of the form and forms to request to request it can be found at the link below.

https://www.nenkin.go.jp/service/shaho-kyotei/shikumi/shinseisho/usa/usa1.html

When I did this before I think my application form was slightly different from those listed here, as these require you to provide a US address, which I don't have.

Also note that the "J/USA 6" is for when you pay in Japan but not the US, and the "USA/J 6" is for when you pay in the US but not Japan.

Answer 5

According to IRS.GOV, A US citizen who lives abroad must file a return. However, if he/she is living in a country that has a tax treaty with the US, he/she must earn less than 108,000 USD to avoid paying US taxes.