Self-employment is a popular choice among expats because it provides the freedom not only to be in charge of your business but also, in certain cases, to adhere to your own schedule and live where you please. If you are one of the many self-employed Americans living in Germany, you may be aware that self-employment means facing additional complications related to your expat taxes. To ensure that you avoid paying more tax than necessary, make sure you take advantage of every deduction available to you and carefully review your reporting requirements.
Reporting Requirements for Self-Employed Expats
If you are an American citizen and your income meets or exceeds certain thresholds, you are required to file an income tax return. Even if you have not lived in America for many years and have no US-generated income, exceeding the income threshold triggers a filing requirement. The threshold for self-employed expats is much lower than for expats who are not self-employed. If you earn more than $400 as a self-employed expat, you have an IRS-mandated filing requirement.
Other tax obligations also apply. In addition to the standard US income tax, you will likely owe self-employment taxes. The self-employment taxes can be paid with your estimated taxes or with your income taxes, depending on your situation.
Residents of Germany pay taxes to Germany as well. In order to avoid double-taxation on your income, a number of tax stipulations can help reduce your US tax burden. These provisions include the Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit, and totalization agreements. Utilizing these provisions to their full extent can make a great deal of difference on the amount of tax that you owe.
The Foreign Earned Income Exclusion and the Foreign Tax Credit
The Foreign Earned Income Exclusion permits you to exclude the first $112,000 of your 2022 (filed in 2023) foreign earned self-employment income on your US income tax return. For the 2021(filed in 2022) tax year, you may exclude $108,700. The Foreign Tax Credit allows you to take a credit on your US income tax return for certain foreign income taxes paid to a foreign government on your self-employment income. In other words, the taxes you paid to the German government can be written off dollar-for-dollar on the amount that you owe to the US.
Totalization agreements are tax treaties that the US government has enacted with certain other countries to help determine to which country taxes are owed. Factors such as where you live and work, and how long you intend to remain as a resident are considered when making this determination. These agreements ensure that you do not have to pay social security taxes to two governments when you would only receive one benefit.
To further reduce your US tax obligations, self-employed expats are allowed to deduct expenses they incur for ordinary and necessary expenditures related to their business. These deductions can include business use of vehicles or equipment, home office expenses, and the cost of goods sold. The IRS has compiled a complete list of deductible expenses.
Though Germany’s tax year aligns with the US tax year, their deadlines are different. While in most years, the US deadline is April 15 (though in 2022, it is April 18), in Germany the tax deadline is July 31. There is an optional extension you can request if you wish via a written application.
Want More Information About Expat Taxes for the Self-Employed?
Expat taxes can be complicated when you are self-employed, but the best way to ensure you are not overpaying your taxes is to work with a professional who specializes in expat tax preparation. Contact us today for more information!