expat working abroad

Foreign Earned Income Exclusion for Freelancers

What is Foreign Earned Income Exclusion (FEIE)?

Foreign earned income exclusion prevents US expats income from being taxed by the IRS and the foreign government where they reside at the same time. In simple terms, If you earn income as a US citizen while permanently residing in another country, this income could be subject to income tax from both countries. To avoid double taxation, you need to elect for the exclusion on the IRS tax form 2555. However, not everyone qualifies, and requirements must be met in order to be excluded from US taxation. 

Requirements to Qualify for FEIE:

Per the IRS, you can qualify for the Foreign Earned Income Exclusion if you fall under one of these categories:

  • You are a United States Citizen that is a bona fide resident of a foreign country for an uninterrupted, full tax year
  • You are a US resident alien who is a citizen or national of a foreign country with which the United States has an income tax treaty, AND you are a bona fide resident of a foreign country for an uninterrupted, full tax year
  • You are a US citizen or US resident alien who is physically present in a foreign country for at least 330 days during a period of 12 consecutive months. 

If you fall under one of these categories, you are eligible for FEIE. However, you still need to elect for the exclusion on IRS tax form 2555. 

IRS Tax Form 2555

The IRS tax form 2555 is where you will claim your Foreign Earned Income Exclusion, as well as housing exclusion (HE) or housing deduction (HD) if you qualify under the bona fide residence test or physical presence test. However, there are a couple of things you should keep in mind when filing the IRS form 2555:

  • There is no joint filing on the IRS Form 2555, even if the other filer is a spouse. Each US Expat needs to file their own form 2555.
  • Have your form 2555 from the previous year handy to make the process easier
  • You must have your foreign income earnings statements to fill out the form properly
  • As a self employed individual (freelancer or registered LLC), you may qualify for the Housing Deduction only. Housing exclusion is reserved for employed individuals exclusively. The only time you would qualify for both the housing deduction and exclusion is if you were both employed and self-employed in the same tax year. 
Self Employment Tax

Self employment taxes are taxes taken out of your income for Social Security and Medicare benefits. While FEIE may exclude the taxes on your earned foreign income, you still have to pay SE taxes, even as a U expat. Even if you are a register LLC, you still must pay SE taxes, unless you have opted to have the LLC taxed as a corporation. To avoid double taxation on social security taxes, The United States has social security totalization agreements with 31 countries, 28 of which are currently in effect. 

Three of the 31 countries are still pending an effective date. The list of countries in agreement can be found here. In cases where your home country has an agreement with the US, you will only be taxed for the home country’s social security tax. If you would like to reduce your self-employment taxes, consider forming an S-corporation. The revenue acquired from an S-corp is paid to the corporation, not the individual. If you pay yourself dividends instead of adding the income to your salary, it can lower your self employment taxes because the dividends are not considered self-employed income. 

How Does FEIE Save Self Employed Individuals Money?

To put it into perspective, we will provide an example. You are a self-employed US expat making $100,000 dollars (£80,321.50 pounds) who has lived in the United Kingdom for over 330 days (12 consecutive months). The current estimated taxes you would pay in the UK alone are  £25,093 ($31,240). By qualifying for FEIE, you are not subject to double taxation, and the amount you pay for your UK taxes is the total amount you will pay. On the other hand, if you did not qualify for FEIE and were double taxed by the US, an additional $15,300 (£12,289.19) would be added to this total. This means the total taxes you paid while qualifying for FEIE are $31,240 (£25,093), versus $46,540 (£37,382.19) if you did not qualify for FEIE. 

* These are general estimated tax figures used in this example. No standard deduction, business expenses, or other deductions were taken out while calculating these figures. Consult with an accountant to determine the amount of taxes you owe in the US, or a foreign country.

For more info on the FEIE and other expat tax services, visit...ProtaxConsulting.

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About the Author

PJ is the creator and CEO of TravelDeveloper.com. A digital nomad since 2012 - he's constantly looking for where to work and surf next.

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