There are a lot of responsibilities when it comes to being self-employed, and sometimes it feels like the list is never ending. When you make it down your list to taxes, you may not know where to start. Today we will go over Schedule SE on your tax return, but feel free to browse our blog catalogue on other related topics!
What is a Schedule SE?
Schedule SE (Self-Employment Tax) is part of Form 1040 that is used to calculate and report Social Security and Medicare taxes owed on your business income. The minimum threshold is if you’ve earned $400 or more in net self-employment income.
Unlike typical employees whose employers cover half of these expenses, self-employed individuals are responsible for the entire 15.3% (12.4% for social security and 2.9% for Medicare).
Even if you live abroad, if you’re a U.S. citizen or resident earning money through self employment, this applies to you.
Who files this form?
If you’re self-employed making net earnings of at least $400 during the tax year, you’re required to file this form. Possible scopes of work can include:
- Freelancers, gig workers, and independent contractors
- Sole proprietors and single-member LLCs
- Side hustlers and anyone with 1099 income
- Farmers or fishers with certain earnings
Even if you’re not an official “business”, if you’re earning money on your own, the IRS considers that self-employment. That is important to know if you decide to take on any side jobs and wonder if you need to report it to the IRS.
🛑 Don’t assume you’re exempt just because you’re paying income taxes in another country.
Self-employment tax is separate from income tax. Unless your country has a totalization agreement with the U.S. (like Spain, Germany, or Australia) and you claim that exemption properly, you still owe self-employment tax in the U.S.
What are the benefits?
It might seem like just another form to file, but there are many reasons how it can help you in the long run. By filing correctly it can help you:
- Build up Social Security credits – they count towards retirement, disability, and survivor benefits later in life
- Stay compliant with the IRS – Foreign-based business owners are often under closer watch when it comes to international income. Filing this keeps your business in good standing
- Qualify for tax deductions – such as the Self-Employment Tax Deduction, which lets you deduct 50% of your SE tax to lower your income tax (woo!)
- Avoid loan complications – you’ll avoid any issues when it comes to applying for mortgages, loans, or government benefits
- Legitimate your business – provides credibility for your business as you grow your venture
What happens if you don’t file?
Neglecting or forgetting to file Schedule SE can result in steep consequences, including:
- Penalties and interest for unpaid taxes
- IRS audit possibilities or notices for unreported income
- Loss of Social Security credits, which may reduce or eliminate future benefits
- Difficulty proving income if you apply for loans or health care subsidies
In short, failing to file this form can not only result in short term penalties, but long term effects as well. Even if you live abroad, the IRS still wants to know if you’re accumulating income from being self-employed.
If you live in a country where there’s a tax treaty, you can be exempt from double taxation as an expat.
Filing Schedule SE Is Easier Than You Think—And Too Important to Skip
Whether you live in the U.S. or are living abroad, if you’re self-employed, you most likely need to be filing Schedule SE. If you’re unsure how to start, the good news is that a tax advisor will put you on the right path.
Navigating tax rules can be overwhelming. We specialize in helping foreign-based business owners understand and meet their U.S. tax obligations.
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