Self-employment in the United Kingdom

U.S. Tax Help When You’re An Expat In The U.K. ➥ Self-Employment and 8858

Self-Employment and 8858

Should I report my UK pensions even if I’m self-employed?

If you are self-employed and living in the UK, you’d effectively be the only person putting money into a pension fund. This means that you automatically have to report the pension as a foreign trust.

Is there any way around reporting my UK pension as a foreign trust?

There is no way around it, because your personal contributions are more than employer contributions which in this case are 0. So, you automatically have to file foreign trust forms for your pension plan.

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Will this affect my tax liability?

This won’t be an issue for US tax liability, as whatever the pension earned is, it will not be taxable. If you ensure that you properly and timely file the forms, with accurate information, then there is nothing really to worry about.

The filing deadline is March 15, not June 15. If you are applying for an extension, make sure you apply before March 15. The extension will only be valid until September 15. If you don’t adhere to this, you could get a $10,000 USD penalty.

What do I need to file if I’m a US citizen or Green Card Holder self-employed in the UK?

Fur US tax purposes, being self-employed is someone who has a business that is unincorporated. Once incorporated the implications are different.

If you are self-employed, you have to report income and expenses on schedule C, which is attached to your tax return. On this schedule we compute your net self-employment income which will flow to your 1040 tax return and will go on to calculate the income tax on that. Whatever income taxes you’ve paid in the UK to HRMC can offset your US income tax liability.

What tax is self-employment income subject to?

Your net self-employment income is subject to separate type of tax (self-employment tax), which is Medicare and social security taxes. As the US has a social security Totalisation Agreement with the UK, as a self-employed business in the UK you will not have to pay US taxes. Whatever the net self-employment income is, it is exempt from the US self-employment tax. However, you will need to attach a statement to your tax return that states it is a UK business, that the UK has a Totalisation Agreement with the US and it is therefore exempt from taxation.

Can I use the Foreign Earned Income Exclusion for self-employment tax purposes?

The better option to use is the Foreign Tax Credit (FTC), however if this isn’t an option for you then the next best option is the Foreign Earned Income Exclusion (FEIE).

For example, if you are self-employed in the UK and not paying enough tax and therefore do not have enough tax credit to use, you can use the FEIE. This is available as self-employed income is considered earned income for FEIE purposes.

What is Form 8858?

From the tax year 2019 onwards, there is a new form required for self-employed people to complete – Form 8858. This form is an Information Return for Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs).

This form is due at the same time as your 1040 income tax return.

Why do self-employed businesses have to file Form 8858?

A self-employed business is considered a foreign branch. If you earn self-employed income outside the business, even if this is just consulting income, it is considered a foreign branch – so you have to file Form 8858. This form is just information and is usually a copy and paste from your Schedule C, with some additional information. Tax professionals will charge a small fee for completing Form 8858.

If you fail to file Form 8858 when it is required of you, you could face penalties and a $10,000 USD fine.

Remember your FBARs

The Foreign Bank Account Report (FBAR) or FinCEN Form 114 is an annual report that is used to show your financial interest in or authority over a foreign financial account.

FBAR filing is required for US persons (including self-employed) holding non-US accounts in which the added maximum balance of all of these accounts exceeds $10,000 USD at any point during the calendar year (January 1 – December 31).

Failing to file FBARs in the last six years can result in severe fines and penalties. The fine can be $10,000 USD per violation, and if you have been found to be wilfully avoiding filing, the fine can be a hefty $100,000 USD or 50% of the account balance at the time of violation.

If I’m self-employed can I claim for a Child Tax Credit Refund?

If you are self-employed and wanting to claim for a child tax credit refund, to qualify you must also have made contributions to the country’s social security equivalent, such as National Insurance in the UK.