u.s. expat tax guide – india
What does it mean to be self-employed as a US expat in India?
If you work for yourself, whether as a freelancer, contractor, or small business owner, the IRS considers you to be self-employed.
Whether you’re a US/Indian dual national, Green Card holder or short-stay US expat, the rules apply to all “US people”.
This means you do not have a legally registered company and earn income independently. Examples include offering consulting services, running a small shop, or working on independent contracts.
The key is that you operate on your own without a formal company setup.
How do self-employed individuals report their income?
If you are self-employed, you must report all your worldwide income, including income earned in India, to the IRS. To do this, you need to complete Schedule C (Profit or Loss from Business), which details your business income and expenses.
The net income from Schedule C is then reported on your Form 1040. The net income is your earnings after subtracting allowable business expenses, such as office supplies, travel, and marketing costs.
Do I need to pay self-employment tax?
Yes, self-employed individuals must pay self-employment tax, which is separate from regular income tax. Self-employment tax covers Social Security and Medicare contributions, and the rate is 15.3% of your net self-employment income.
Many expats mistakenly believe that paying income tax in India exempts them from US self-employment tax.
However, the US does not have a Totalization Agreement with India to avoid dual social security taxation.
This means that self-employed individuals in India must pay the full 15.3% self-employment tax to the US, even if they are already paying similar taxes in India.
How do the Foreign Earned Income Exclusion and Foreign Tax Credit apply?
The Foreign Earned Income Exclusion (FEIE) allows you to exclude up to US$126,500 of your earned income from US taxes in 2024. You may also use the Foreign Tax Credit (FTC) to offset your US tax liability with the taxes you have paid to the Indian government.
However, it’s important to note that neither the FEIE nor the FTC can reduce your self-employment tax.
They only help to lower your regular income tax, not your contributions for Social Security and Medicare.
Why is self-employment tax mandatory without a Totalization Agreement?
The US has Totalization Agreements with several countries to prevent dual taxation of social security contributions. Unfortunately, there is no such agreement between the US and India, meaning US expats in India must pay self-employment tax in the US even if they are paying similar taxes in India.
This lack of an agreement can be frustrating, as it results in effectively paying twice for similar social services without an offsetting credit.
What are the steps to file self-employment income?
- Calculate Your Net Earnings: Use Schedule C to calculate your net earnings by subtracting any business expenses from your gross income.
- Fill Out Schedule SE: After calculating your net income, use Schedule SE (Self-Employment Tax) to determine your self-employment tax liability. This amount will then be reported on Form 1040.
- Claim Deductions and Credits: Use Form 2555 to claim the Foreign Earned Income Exclusion or Form 1116 to claim the Foreign Tax Credit. Remember, these forms reduce your regular US income tax, but not your self-employment tax.
What expenses can self-employed individuals deduct?
If you are self-employed, you can deduct various business-related expenses to reduce your taxable income. Some common deductible expenses include:
- Office Supplies: Items like paper, pens, and other supplies used in your work.
- Travel Expenses: Costs related to business travel, such as flights, lodging, and meals.
- Marketing and Advertising: Any expenses related to promoting your business, such as website costs or online ads.
- Home Office Deduction: If you use a part of your home exclusively for business, you may qualify for a home office deduction.
- Professional Services: Fees paid to accountants, lawyers, or consultants related to your business.
- Insurance: Premiums for business insurance, including liability or health insurance for yourself as a self-employed individual.
These deductions are subtracted from your gross income to determine your net self-employment income, which is then subject to both income tax and self-employment tax.
How can US expats reduce their tax burden?
While self-employment tax must be paid, there are strategies to reduce your overall tax liability:
- FEIE: The Foreign Earned Income Exclusion can help reduce the portion of your income subject to US federal income tax.
- FTC: The Foreign Tax Credit can offset US taxes on income that has already been taxed in India, though it does not reduce self-employment tax.
- Business Deductions: Make sure to deduct all legitimate business expenses on Schedule C to reduce your net income and, consequently, your self-employment tax liability.
Should I get help from a tax professional?
Yes, it’s extremely advised to do so. Filing taxes as a self-employed expat is complicated, particularly with additional self-employment tax requirements.
It is advisable to work with a tax professional experienced in both US and Indian tax systems. They can help you maximize your deductions, ensure compliance, and save money in the long run.
A professional can also guide you on which forms to file and how to properly apply exclusions and credits.
