US Self-Employment Tax - Any way to reduce or eliminate it???

[denalipop]

Like a few people on here, I'm a self-employed US citizen living in NZ.


Because I'm self-employed, I have to pay a "self-employment tax" on top of the usual income tax.


The self-employment tax is for social security and medicare.


The self-employment tax is based on your worldwide income, and is not reduced by any foreign earned income exclusions.


It also is not affected by any foreign tax credits.

Some countries' tax treaties with the US exempt people from paying the US self-employment tax if the other country has its own self-employment tax.


Unfortunately, New Zealand is not one of those countries.


This means we *always* need to pay the full amount of the US self-employment tax, regardless of where we lived or what taxes we paid to other countries.


My questions:

1) Is there any [non-obvious] way to reduce or eliminate the US self-employment tax?

2) Can we declare the US self-employment tax as an overseas tax credit on our NZ taxes?


Thanks!

[brightspirit1]

I know this is an old thread, but I am in a similar situation. It seems unfair since we have such high taxes in NZ and the equivalent of social security comes out of our NZ taxes. Have you learned anything new or are we just stuck paying the tax (which I believe is on the order of 15%).

Like a few people on here, I'm a self-employed US citizen living in NZ.


Because I'm self-employed, I have to pay a "self-employment tax" on top of the usual income tax.


The self-employment tax is for social security and medicare.


The self-employment tax is based on your worldwide income, and is not reduced by any foreign earned income exclusions.


It also is not affected by any foreign tax credits.

Some countries' tax treaties with the US exempt people from paying the US self-employment tax if the other country has its own self-employment tax.


Unfortunately, New Zealand is not one of those countries.


This means we *always* need to pay the full amount of the US self-employment tax, regardless of where we lived or what taxes we paid to other countries.


My questions:

1) Is there any [non-obvious] way to reduce or eliminate the US self-employment tax?

2) Can we declare the US self-employment tax as an overseas tax credit on our NZ taxes?


Thanks!

[denalipop]

Any self-employed income you receive will be taxed by the US, and will be on top of your other taxes. There are no deductions for families, head of household, etc., so it's a huge burden, especially since the NZ taxes are already high.

However...

I was fortunate, because my NZ-based company agreed to re-hire me as an employee. They withhold PAYE and ACC from each paycheck, and pay me what's left over. I opted out of Kiwisaver (since I'm already forced to contribute to the US pension, which is social security). Since I am a full-fledged (though part time) employee, I no longer have NZ-based self-employment income. So that portion of my income is exempt from US social security contribution.

I still have US self-employment income, so have to pay estimated taxes on that, but thanks to a gradual shifting of my hours from US-based work to NZ-based work, the US self-employment income (and therefore tax) is much smaller now. It's not nearly as daunting as last year!

[chrisl34]

I know this is an old thread, but I am in a similar situation. It seems unfair since we have such high taxes in NZ and the equivalent of social security comes out of our NZ taxes. Have you learned anything new or are we just stuck paying the tax (which I believe is on the order of 15%).

I am a tax accountant and have not looked at this issue before, but the 2 areas I would look into are:

1. Generally under a Tax Treaty the US would only be able to charge tax if the self-employed services were performed in the US through a permanent establishment there. The NZ/US tax treaty may be different but worth checking.

2. Even if US does still have the right to tax, you should generally be able to claim a tax credit in the US for the NZ tax paid on that self-employed income, so double taxation does not arise.

If the issue is ongoing and amounts material, you should take professional advice as it may solve your problem.

[denalipop]

Ok, I'll try to remember what I learned last year. I spent a lot of time researching the issue and talking to the IRD, the IRS, and a couple tax accountants, but it's been a while, so please excuse any mistakes in the terminology.

Basically, the things I learned were these:

The US has full tax treaties with Australia, Canada, and much of Europe, but not (for some reason) New Zealand. There is a NZ/US tax treaty, but it is incomplete. For most parts of the US income tax, double taxation is prevented. However, the agreement does not include the US self-employment tax. I think this is because the US self-employment tax is similar to a pension scheme, and there is no current agreement between the US and NZ about "syncing up" their pension schemes.

It's a little strange, since the US and Australia have a complete agreement, and Australia and NZ have a complete agreement, but the agreements are not transitive. Personally, I think it's just a matter of paperwork. It takes time and $$$ to iron out the details of tax and pension agreements, and NZ isn't as big a trade partner as Australia, Canada, or those European countries, so there isn't as much incentive.

In NZ, the pension contributions are part of the NZ income tax. They are unavoidable, and their percentage is hidden from the tax payer. At least, the casual tax payer.

In the US, it's different. There are separate line items for "social security" (and some other smaller items), and when you have self-employment income, those amounts become very apparent to you. Painfully apparent, for those of us in NZ. Contributions are still mandatory, but they are not hidden in the same way that they are in NZ. Also, the social security component is handled by a different department than the other parts of the income tax. Depending on whom you talk to within the IRS, the social security contributions are sometimes regarded as "independent of the income tax".

The IRD has a different perspective. Here in NZ, the social security (pension) tax is considered part of the income tax. And, fortunately for us, they regard other countries' social security (pension) taxes as part of the overseas income tax, since it works that way here in NZ. This means that we can declare the US self-employment tax as an overseas tax credit on our IR3.

The strange thing is... What happens when all our income comes from NZ self-employment, and we declare that income as a foreign income exclusion on the US tax return? In the US, our taxable income become $0, but we still have to pay US self-employment tax on all our worldwide self-employment income. So in the US we have $0 taxable income, but a large self-employment tax. How could the IRD possible allow you to declare an overseas tax credit without overseas income???

Fortunately for me, I shifted from self-employment work to employee over here in NZ. So the US cannot tax any of my NZ income, as it's all declared as a foreign income exclusion. All that's left of my self-employment income is the US portion, which isn't very much. So although I have a self-employment tax to pay in the US, it's in proportion to my US income, so it doesn't create any weirdness on the IR3.

I have no idea what would happen to someone with 100% NZ-based self-employment who is trying to claim 100% foreign earned income exclusion in the US. They'd probably need to either get themselves reclassified as an employee (to shake off that awful self-employment tag) or "accidentally" neglect to tell the US about it (which apparently many expats do), or maybe just tell the IRS it's employee income. Either that, or suffer greatly from the double taxation. That would be a very uncomfortable position to be in, and I'm glad I'm not in it.

For all US expats' sake, I hope the US gets off its butt and finishes the tax agreement with NZ. They've been dragging their feet too long. Maybe some higher-up in the IRS will be a Hobbit fan and regard "little" NZ with the respect it's due.


Please feel free to correct any mistakes. As I said before, it's been a year since I immersed myself in tax issues.

[denalipop]

My partner performed self-employed work during the 2014 tax year. The work was for a NZ company, and it was performed in NZ (and Italy). We have not been in the US since 2009.

According to Publication 901, "Income that residents of New Zealand receive for performing personal services as independent contractors or self-employed individuals is subject to the provisions of Article 7 (Business Profits) of the treaty. Under that provision, business profits are exempt from U.S. income tax unless the individual has a permanent establishment in the United States. If they have a permanent establishment in the United States, they are taxed on the profits attributable to the permanent establishment."

What is a "permanent establishment" in the US? We haven't lived in the US since 2009, nor do we intend to return.

Is US citizenship considered "permanent establishment"? How about a US green card (which expired a couple years ago)? Or does permanent establishment in the US require physical presence there?

If we do not have a "permanent establishment" in the US, then does that mean we do not have to pay the self-employment tax on any self-employment income we receive from NZ companies while we are living in NZ?

Or do we still need to pay self-employment tax on NZ-sourced self-employment income no matter what?

In other words, is the only way to avoid paying US self-employment tax to do what I did for my NZ income, which is to get reclassified as an part-time employee (with PAYE withdrawn each paycheck) rather than a self-employed contractor?

[Norgal]

Renounce your US citizenship and free yourself!

[kiwieagle]

Unless you fill out I-407 and officially abandon permanent resident status, the green card entitles you to pay US taxes. Lucky you! Even if you've abandoned permanent resident status by leaving the country and not maintaining residency requirements, you still are liable for taxes until you officially relinquish the green card.

How that relates to your larger question of whether or not you have to pay taxes as a self employed person, I do not know. I only know that the IRS doesn't care about the status on the green card, only that you have it.

[lisl71]

I'm so glad I found this thread in time! I got offered part-time work recently and haven't yet handed over my IRD number as I was offered the chance to be a contractor or a part-time employee. I'm going for employee status now after reading through all this!

[denalipop]

Just a quick update, for US citizens/residents wondering about working as a self-employed contractor in NZ:

My partner (who is a US permanent resident) has had a few part-time jobs here in NZ since I last posted. Each time she gets a new job, she asks if she can be an employee (with PAYE withheld). Some places say yes, others say no, which means they have to pay her as a self-employed contractor.

For each "self-employed" job (where no PAYE is withheld), she has to pay the normal NZ income tax, PLUS the US self-employment tax on top. Since all her work is in NZ, she has no overseas income, and so cannot claim the US self-employment tax an overseas tax credit. (The IRD confirmed that you cannot declare an overseas tax credit without overseas income). So, she is stuck paying that horrible US self-employment tax. There is, as far as I know, no way around it (short of renouncing US residency or citizenship).

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It would be nice if there were a "proxy" company in NZ which offered to act as an employer for tax purposes. So, if someone insists on paying you as a contractor, you would have your income go to the proxy company instead of yourself, and the proxy company would withhold PAYE and ACC (and potentially KiwiSaver) for you. So, technically you would be "employed" and therefore exempt from the US self-employment tax.

Do such companies exist? Would they be considered "dodgy" or perfectly legit, in the IRD's eyes? Or does it all matter how many of the employee-vs-contractor boxes they can tick on this page:

http://www.ird.govt.nz/payroll-emplo...ontractor.html