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What constitutes self-employment income?

Self-employment income in the context of a US citizen or green card holder living in the UAE refers to income earned from services performed as an independent contractor, working in the gig economy, or running one’s own business, but a business that is not incorporated as an LLC.

This income is different from wages earned as an employee and encompasses earnings from various sources for services rendered.

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What do I need to know when reporting my self-employment income to the IRS?

For US expatriates, self-employment income must be reported to the IRS, regardless of where the income is earned. This requirement comes from the US’s unique tax system, which taxes its citizens and permanent residents on their global income.

Here are a couple of things to consider:

  • Form 1040 and Schedule C: Self-employment income is reported on Form 1040, with additional details provided in Schedule C, which outlines the gross revenue received and expenses incurred.
  • Allowable Deductions: Expenses related to self-employment activities, such as home office costs, advertising, licenses, and meals, can be deducted to arrive at the net income.
  • Tax Rates: The net income from self-employment is subject to federal income tax rates and the self-employment tax, which covers Social Security and Medicare contributions, at a rate of 15.3%.
  • Foreign Earned Income Exclusion (FEIE): This allows qualifying individuals to exclude a portion of their foreign earned income from US taxable income. For self-employed expatriates in the UAE, this can mean excluding a substantial part of their earnings from US taxes, provided they meet the eligibility criteria.

Will I have to pay self-employment tax to the IRS?

Yes. Some countries have a Totalization Agreement with the United States which prevents the need to pay self-employment taxes on money made outside the United States. Unfortunately, the UAE does not have a Totalization Agreement with the US, so self-employment tax may have to be calculated on self-employment income made in the United Arab Emirates.

Can I get around the US self-employment tax when working for myself in Dubai?

Yes. Some US citizens and Green Card holders set up an LLC in the UAE and work as an employee for their own company. When set up correctly, this can remove self-employment tax. Owning an LLC in Dubai comes with its tax burdens such as filing a Foreign Corporation Return and GILTI, but for many, that is better than paying self-employment tax.

What steps should I take for strategic tax planning?

  • Seek Professional Advice: Consulting with a tax professional who specializes in expatriate tax issues can provide tailored advice and ensure compliance with US tax laws.
  • Understand Eligibility for FEIE: Assessing one’s situation to determine eligibility for the FEIE and understanding how it applies to self-employment income.
  • Keep Detailed Records: Maintaining comprehensive records of income and expenses to accurately report self-employment income and claim allowable deductions.

Why partner with a specialist Expat accountant?

Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in the UAE. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.

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