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How does self-employment income in Saudi Arabia work?

Hey there, US expats in Saudi Arabia! If you’re diving into the world of self-employment, there’s something important you should know. Unlike some other countries, the US and Saudi Arabia don’t have a totalization agreement. What does this mean for you? Well, if you’re self-employed and earning a net income, you’re looking at a 15.3% self-employment tax. This might seem a bit steep, but it’s how things work without that agreement in place.

What’s the difference between federal taxes and self-employment tax?

Now, let’s clear up some common confusion. Federal income tax and self-employment tax are two different things. Your federal tax depends on how much you earn and your tax bracket, while the self-employment tax is a set percentage on your net self-employment income. 

  • Federal Income Tax: This tax is based on your income level and filing status, and it’s progressive–meaning the more you earn, the higher the percentage you pay. As of 2023, the federal tax brackets range from 10% for the lowest earners to 37% for those in the highest income bracket. So, if you’re earning more, you’ll be paying a higher percentage of your income in federal taxes.
  • Self-Employment Tax: This is a flat rate of 15.3% on your net self-employment income. This rate is split into two parts: 12.4% goes towards Social Security and 2.9% towards Medicare. Unlike federal income tax, this rate doesn’t change based on how much you earn from your self-employment.

Does it matter if I’m a sole proprietor or corporation?

Here’s where it gets interesting. If you’re a sole proprietor, the IRS sees you as self-employed, and that self-employment tax applies to you. But, if you’ve set up a corporation or an LLC in Saudi, the game changes. You might be an employee in your own company, drawing a salary and maybe some dividends. This setup can change how you’re taxed and might save you from that self-employment tax.

If you’re planning to be self-employed in Saudi, it’s extremely smart to get some US tax advice first. Setting yourself up the right way can make a big difference in how much tax you pay. You might find ways to structure your business that help you avoid or reduce self-employment tax.

Should I avoid being self-employed in Saudi?

Yes, it’s a good idea to think twice about being self-employed in Saudi if you can. Without a totalization agreement, that self-employment tax can be a bit of a burden. But don’t worry, with the right setup and some help from a tax professional, you shouldn’t encounter too many problems.

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