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Thread: USA Self-employment tax is a very real problem

  1. #1
    Join Date
    Jan 2013
    Location
    Vermont, USA --> Wellington
    Posts
    159

    Default USA Self-employment tax is a very real problem

    There's been a bit written about this in throughout the history of the forum, but not enough to make me think it was really a big deal. I've learned this the hard way.

    If you are a self-employed American living in NZ, you will be double-taxed.

    I was working as a contractor during the 2016-2017 tax year. In April 2017, I filed my taxes with the USA. I owed NZD $30,000 in S/E tax. In July, I filed my return with the IRD. I owed NZD $65,000. I wrote off $30,000 as foreign taxes paid. Several months later, the IRD came knocking looking for that $30,000. I can't claim it as a credit. I have to pay full taxes in NZ and full S/E tax in the USA. It brings our effective tax rate to 48%.

    I was in denial about this for a while, but the more I looked into it, spoke with accountants both here in NZ and back in the USA, it's true. NZ simply does not recognise S/E tax as an income tax -- even though it is a tax based on my income that I have to pay, or else go to jail.

    I'm currently in negotiations with the IRD. We simply don't have the means to pay it. It's really ugly.

    The crux of the issue is that S/E tax is looked at as a "contribution" to your Social Security and Medicare entitlement, that you will get back when you retire. NZ seems to look at it like Kiwisaver, where you have a dollar-for-dollar entitlement. Of course, Social Security does not work that way. As soon as I put in $1, I had an entitlement, and it's not like I can only take out what I put in. It's much different.

    Many other countries recognise this. If we lived in Australia, or the UK, or even places like Hungary and Chile, for instance, the double taxation treaty would prevent this from happening. NZ has no such agreement.

    It's hard for me to imagine that a single-income family can be taxed at a rate of 48% and the IRD can take an honest look at that and say it's the intended outcome, but it is. NZ doesn't want to subsidise the USA's unfair tax system, and they make it your problem as an American, not theirs.

    With 25,000 Americans living in NZ, surely many of them would be dealing with this, right? The minute you take a job on contract instead of PAYE, you're exposed to double-taxation. Well, yes, I've since met a number of Americans here who have gotten killed by this and learned their lesson. So I looked into it a bit more.

    What you can do

    Set up a company. Just do it.

    Setting up companies in NZ is extremely common and incredibly easy to do. There's a reason this country frequently gets rated one of the most business-friendly countries in the world. Once you sit down with an accountant and see the benefits, you'll wonder why you hadn't to begin with.

    As it relates to the USA, however, the company will allow you, with some clever accounting, to create the illusion on your US tax return that you are employed by a company and earning wages. You'll pay a bit for the accounting services necessary to make it look that way, but it's worth it.

    I'm very much looking forward to the day I get to file a tax return with the USA that says "0" at the bottom.

    Hope this helps. Don't let it happen to you. Please. It's awful.
    Last edited by A.C. Slater; 28th March 2018 at 12:04 PM.

  2. #2
    Join Date
    Nov 2004
    Location
    NZ
    Posts
    833

    Default

    Thanks so much for laying out your painful experience, I'm sure many will benefit from this post. I'm certainly glad right now that my husband set up a company. It's still US based, but since he needs to get a job here in order to get residence anyway, I'm not sure how much longer it will matter.

    We did avoid getting a visitor's visa for longer than 6 months, because we would have likely faced double taxation in that situation as well. Maybe his company would have protected him, I'm not sure - but I've heard that the US's unique position on taxing income made anywhere in the world is a motivator for some people to actually drop their citizenship (in more extreme cases, no doubt, where the person has hardly ever even lived in the US).

    So you would normally be able to write off taxes paid to the US on your NZ tax form? It's the self-employment situation that caught you in a bad place?

  3. #3
    Join Date
    Apr 2018
    Location
    Canada
    Posts
    13

    Default

    What is S/E tax? (I'm Canadian...self employed or something else?). Are you still running a business in the US from NZ? Do you have a NZ only business? I plan to be self employed again eventually in NZ, as I have been in Canada for over 10 years. Is this something I have to worry about? I assumed I would simply pay tax in NZ...hopefully.

  4. #4
    Join Date
    Nov 2017
    Location
    Germany
    Posts
    163

    Default

    Quote Originally Posted by 7Acre View Post
    What is S/E tax? (I'm Canadian...self employed or something else?). Are you still running a business in the US from NZ? Do you have a NZ only business? I plan to be self employed again eventually in NZ, as I have been in Canada for over 10 years. Is this something I have to worry about? I assumed I would simply pay tax in NZ...hopefully.
    I'm don't think this applies to Canada--I'm certainly not an international tax expert, but the USA is one of the only countries in the world that feels entitled to it's citizens' incomes even when they live and earn abroad. (I want to say that Iran is the only other country that does this?)

  5. #5
    Join Date
    Apr 2018
    Location
    Canada
    Posts
    13

    Default

    Canada seems fine:
    https://www.canada.ca/en/revenue-age...nts.html#mgrnt

    That's strange and very unfortunate

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