Many US expats who move abroad require a means to financially support themselves and their families. For those who work overseas as contractors, this is a more flexible set up and allows more mobility for the individual and less paperwork for the hiring company. While working as a contractor in a no-tax country such as Saudi Arabia, Qatar or the United Arab Emirates may seem like a golden ticket, contractors in these countries must still comply with US tax obligations.
Below we have outlined the five most important items contractors working in a no-tax foreign country must be aware of:
1. US tax returns must be filed
US citizens and green card holders – no matter where they are residing – are responsible for filing US taxes if they meet the minimum filing threshold (which for a self-employed contractor is $400!). You must report your worldwide income, so be sure to include any income received from any country. You must file by June 15th each year, or if you file for an extension, you would need to file by October 15th.
2. You may be eligible for tax exemptions
Filing US expat taxes doesn’t necessarily mean you OWE any taxes. Contractors who meet the Physical Presence Test may qualify for certain tax exemptions. Most contractors are not eligible to meet the Bona Fide Residence Test, as the IRS assumes that when a contract expires the contractor would return to the US and this test requires that you have no plans to return. So it is often best to qualify as a US expat via the Physical Presence Test, which requires you to be inside a foreign country for 330 of any 365-day period.
These tax exemptions include the Foreign Earned Income Exclusion (FEIE), the Foreign Tax Credit, and the Foreign Housing Credit. The FEIE, for example, excludes foreign earned income of up to $99,200 in 2014 ($100,800 in 2015) from US tax liability. However, it’s important to note that exemptions on federal taxes may not exempt you from state taxes and you may still be required to pay self-employment taxes. Be sure to review your state’s tax policy to ensure you are in compliance.
3. Foreign financial accounts must be reported
In addition to reporting income taxes, US expats with $10,000 or more (cumulative) in one or more foreign financial accounts must file FBAR Form FinCEN 114. This form must be filed electronically to the US Department of the Treasury by June 30th each year (no extensions allowed).
4. Track your income and expenses
Unlike in the US, countries that don’t have income taxes don’t have any reason to keep a detailed record of your earnings. As a result, you’ll be responsible for documenting any income you’ve earned throughout the year. One of the best ways to do this is to start a spreadsheet that contains the amount you’ve earned, the date you received the payment and the US exchange rate on that date. Any hardcopies, such as pay stubs or bank receipts, should also be saved.
5. Additional taxes may apply
As a contractor you are likely to be viewed as “self-employed” and thus be required to pay US self-employment taxes (Social Security and Medicare). This would include both the employer and employee portion of this tax. You may be required to pay estimated quarterly taxes, too—if you are required to pay these but don’t, you could be hit with a penalty come tax time. If you have questions about exactly what you need to pay to the US or how to calculate estimated quarterly taxes, you are encouraged to speak with an expat tax professional.
Greenback Expat Tax Services specializes in tax preparation for Americans living abroad. Our team of CPAs and IRS Enrolled Agents have decades of experience with US expat taxes. We offer low, transparent, flat fee pricing (no surprises!), a hassle-free process and money-saving results. Get started today!