Tax Issues for Expats
Taxation is a difficult subject in any jurisdiction if the taxpayer has taxable activities besides a basic wage. It is many times more complicated for expatriates who struggle not only with two sets of rules for compliance, but usually are challenged by unusual forms of compensation or have investments and do not speak the local language fluently.
When Social Security / Medicare Taxes Apply Outside Of U.S.
In the course of business I have met many who subscribe to three philosophies of taxation:
- Declare it all everywhere (rare!)
- Hide it all (I run from these people!)
- Declare in the CR what I earn here, and in the U.S. what I earn there.
The third is the most common, but it is incorrect and opens the tax payer to potential liabilities down the road. Because the system is by and large set up to avoid double-taxation of income, Philosophy 1 does not necessarily need to cost the taxpayer more, but it can involve more administration. Unfortunately, Social Security and Medicare is not automatically excluded from double taxation unless there is a bi-national social security agreement (Totalization Agreement) in place between the U.S. and the second country. There is no such agreement between the U.S. and the Czech Republic.
U.S. social security and Medicare taxes continue to apply to wages for services you perform as an employee outside of the United States if you work:
- For an American employer
- On an American vessel or aircraft
- In a country that has a Totalization Agreements with the U.S. and that agreement subjects your foreign employment to U.S. social security and Medicare taxes.
- For a foreign affiliate of an American employer
Preventing Double Payment of Social Security Taxes
To establish that your pay in a foreign country is subject only to U.S. social security tax and is exempt from foreign social security tax, your employer in the United States should write to the U.S. Social Security Administration, Office of International Programs, P.O. Box 17741, Baltimore, MD 21235-7741. Your employer should include a large amount of specific information about you in the letter.
Do I Need to Pay Self-Employment Tax?
A self-employed U.S. citizen or resident working abroad is most likely subject to the self-employment tax. (SE Tax) This is a social security and Medicare tax on net earnings from self-employment of $400 or more in a year. Net self-employment income is used to figure your net earnings from self-employment. Net self-employment income includes all business income less all business deductions allowed for income tax purposes. Net earnings from self-employment is a portion of net self-employment income. This amount is figured on Schedule SE (Short Schedule SE (Section A), line 4, or Long Schedule SE (Section B), line 6). The actual self-employment tax is figured on net earnings from self-employment, regardless of whether it is exemption from personal income tax under the foreign earned income exclusion.
You are working in Prague as a consultant and qualify for the foreign earned income exclusion. Your foreign earned income is $100,000, your business deductions total $35,000, and your net profit is $65,000. You must pay social security tax and Medicare tax on all of your net profit, including the amount you can exclude from income, even though the foreign earned income exclusion excludes the first $80.000.
In conclusion, you will need to do a little research to identify whether you are liable to pay social security and Medicare in the U.S. and the Czech Republic. If you are a sole trader, the answer is almost definitely yes. If you are not a sole trader, you may need to chase a few documents from your employer in order to escape double taxation.
For further information, please refer to our web site at www.cfo2goeurope.com or contact John Mohr directly at firstname.lastname@example.org
What if I have Trvale Pobyt here? Am I still liable for U.S. taxes? I already pay a lot. I wouldn't be able to get by if I had to pay both. What should I do? -- Rick Johnson, Prague
John Mohr respondes:
"If you are an American citizen you are liable to declare your taxes in the
U.S. each year. This is not optional and you can face serious penalties for
not filing your taxes or understating your income. The good news is, depending
on your particular situation, you are unlikely to pay anything."
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