Do I pay US self-employment tax on profit my foreign business already taxed?
Possibly, yes. Income tax and social-security tax are separate questions with separate relief mechanisms. The foreign country taxing your business profit settles its own income tax claim, and it may settle much of the US income tax claim too, through the earned-income exclusion or the foreign tax credit. Neither of those touches the self-employment charge. That charge is a social-security contribution, and only a totalization agreement between the two countries can move it. Where an agreement covers your situation, a certificate of coverage is the document that shows which system you contribute to. Without one, the same profit can carry a foreign income tax and a US social-security charge at the same time.
Does the foreign earned income exclusion cover self-employment tax too?
No. The exclusion works on the income tax base only. It can remove earned income from the calculation of your US income tax and leave the self-employment charge entirely untouched, which is why people who expect to owe nothing find a bill anyway. That charge sits in a different part of the system, funded by social-security contributions rather than general taxation, and it has its own relief route. The route is a totalization agreement, evidenced by a certificate of coverage. Read the two questions separately from the start and the result stops being a surprise.
What is a certificate of coverage and who issues it?
It is the document recording which country's social-security system you contribute to while you work abroad, issued by the authority that administers that system rather than by a tax office. It exists because a totalization agreement settles the social-security question by allocating you to one system, not by splitting the charge between two. In practice the certificate is what you hold when a foreign authority, or the US, asks why contributions are not being paid to it. Obtain it in the period it is meant to cover if you can. Asking afterwards turns a routine request into an argument about facts nobody is recording any more.
I am self-employed abroad, so which question should I answer first?
Split the file in two before touching a form. The first question is income tax: what the foreign country charges on the business profit, and what the earned-income exclusion and the foreign tax credit do to the US charge on the same profit. The second is social security: whether a totalization agreement exists between the two countries and what it says about someone self-employed in your circumstances. The second question is the one people skip, and it is the one that produces the unexpected liability. Settling it first also tells you which authority you should be contributing to while the year is still open.
There is no totalization agreement with my country, so what now?
Then the social-security charge stands, because an agreement is the only mechanism that moves it. The earned-income exclusion and the foreign tax credit still do their work on the income tax side, so the two halves of the file end differently: income tax may come to little or nothing while the self-employment charge remains in full. That is not an error to be appealed. It is the result of two systems operating independently of each other. What is worth examining instead is how the business is established and where the work is physically performed, because those facts decide which system has a claim at all.
Can the foreign tax credit reduce my self-employment tax?
No. The credit relieves double income tax by setting foreign income tax against the US income tax on the same income. The self-employment charge is not income tax, so foreign income tax paid on the business profit does not reduce it, and foreign social-security contributions are not income tax either. The only route to relief on the social-security side is a totalization agreement, which allocates you to one country's system and is evidenced by a certificate of coverage. Where no agreement applies, the charge is simply part of the cost of being self-employed as a US person abroad.
How do I report foreign employment income with no W-2?
A foreign employer does not issue one, and none is required. You report the wages from your own records — payslips, the employment contract, and the foreign tax assessment or return, which is the document a reviewer finds most persuasive — converted to your own currency. Keep the foreign filing with the return, because it is also the proof of foreign tax paid that supports the credit or the exclusion you are claiming. See a US return from abroad.
What is the treaty saving clause, and why does it matter to Americans abroad?
It is the provision that lets each country keep taxing its own residents and citizens as though the treaty did not exist. Because the United States taxes on citizenship, the saving clause is what stops an American in Canada or India using the treaty to remove US tax on ordinary income. A short list of articles is carved out of it — certain pensions, social security, government service, students — and those exceptions are where a treaty position for a US citizen usually lives. See our treaty work.
