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us expat tax guide – germany

Do self-employed Americans in Germany need to file US taxes?

Yes, any self-employed person in Germany who holds US citizenship or a Green Card must adhere to US tax filing requirements, regardless of their employment nature. However, the difference between self-employment and owning a company in Germany affects the filing process significantly.

Sole Proprietorship

A sole proprietorship is the simplest form of business, where there is no legal distinction between the owner and the business.

For US tax purposes, self-employed individuals in Germany report their business income and expenses on Schedule C, which is attached to their individual tax return (Form 1040). This straightforward approach means:

  • Totalization Agreement: There is a special agreement between the US and Germany that prevents US citizens and Green Card holders from paying US self-employment tax for income made in Germany.
  • Foreign Earned Income Exclusion (FEIE): Sole proprietors can utilize the FEIE to exclude a portion of their foreign-earned income from US taxation, provided they meet the eligibility criteria. This can significantly reduce their US tax liability.

Owning a Company

Owning a company, especially a foreign corporation, requires additional forms and considerations as a US citizen:

  • Form 5471: US shareholders of foreign corporations must file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This form is complex and requires detailed information about the foreign corporation, including ownership structure, income, and taxes paid.
  • Controlled Foreign Corporation (CFC) Rules: If a US taxpayer owns more than 50% of a foreign corporation, or if a group of US persons controls the company, it may be classified as a Controlled Foreign Corporation (CFC). This classification triggers Subpart F income rules, potentially leading to immediate taxation of certain types of income earned by the corporation, regardless of whether the income is distributed to the shareholders.

What constitutes the need to file a tax return for the self-employed?

If you’re a US citizenship holder and self-employed in Germany, the threshold for filing a US tax return is remarkably low. Any self-employment income of US$400 or more mandates filing a tax return.

How does self-employment income affect filing thresholds?

Even if your total income, combining employment and self-employment, doesn’t exceed the standard filing threshold (e.g., US$13,850 for singles 2023-2024), earning US$400 or more from self-employment alone triggers the requirement to file a US tax return.

Are self-employed US citizens in Germany subject to double social security taxes?

No, they do not. Thanks to the totalization agreement between the US and Germany, those paying social security in Germany are exempt from paying these taxes to the US, which helps them avoid double taxation.

What tax benefits can self-employed Americans in Germany utilize?

In general, self-employed individuals in Germany can leverage the foreign tax credit or the foreign-earned income exclusion to mitigate their US tax liability. However, it would be best to consult a tax professional, as they can help you check, depending on your specific circumstances, which strategic use of tax benefits can significantly reduce more of your, or even eliminate your US tax obligations.

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