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Home » Self-employed abroad? Here’s what the IRS needs

Self-employed abroad? Here’s what the IRS needs

Self-employed abroad Here's what the IRS needs

Being a digital nomad is one of the more common trends right now. Why not explore the world at the same time as working remotely and not in an office? You can frequently make a decent income from clients who don’t require daily meetings while living in a far-off place with a substantially cheaper cost of living.

You might consider the tax ramifications of such an agreement once you have sorted out the fundamentals, such as where you are residing. The IRS will still want to know about your earnings whether you are a resident alien residing abroad or a citizen of the United States. Fortunately, whether you live inside or outside of the United States, the procedure and regulations for reporting income taxes and paying anticipated tax are the same.

How to Report Your Earnings

You must disclose all of your income if you live and work outside of the country. The IRS wants to know how much money you’ve made in US dollars, whether it was earned domestically or abroad (USD). Since the requirements are the same whether you work for yourself or for someone else, you must still pay anticipated taxes on a quarterly basis just as if you were a resident of the US.

The Foreign Earned Income Exclusion

One benefit to be aware of if you work overseas is the foreign earned income exclusion. If you meet the requirements, you can choose to exclude up to $112,000 of your personal services-related foreign earned income for 2022. Both workers and self-employed people must follow this.

If you physically resided in a foreign country for at least 330 full days during any 12-month period that started or ended in the tax year you wish to claim the exclusion, you are eligible for this exclusion.

You might be eligible to deduct a portion of the cost of your foreign housing from your gross income in addition to the income exclusion. This sum is 16% of the maximum exclusion amount multiplied by the number of days and is equal to your total housing expenses less a “base housing amount.”

Expatriate Tax Credit

Foreign source income is taxed in both the United States and the foreign country in which you work, but the IRS gives you a break with the foreign tax credit. The goal of the international tax credit is to save you from paying taxes in both the United States and the foreign nation.

Any qualifying foreign taxes that you paid or incurred throughout the year can be deducted either as an itemised deduction or as a foreign tax credit. For the following reasons, it is typically preferable to claim the credit for eligible foreign taxes rather than claim an itemised deduction for them:

While a deduction lowers only your taxable income, a credit lowers your real U.S. income tax by the same amount.

Even if you opt not to itemise your deductions, you can still choose to claim the foreign tax credit. The standard deduction is then permitted in addition to the credit.

You might be eligible to carry over or carry back the excess to a previous tax year if you decide to claim the foreign tax credit and the taxes paid or accrued exceed the credit ceiling for that tax year.

Your time is extended.

Last but not least, the IRS automatically grants you a two-month extension to file your return and pay any outstanding taxes without your having to ask for one. The April tax deadline would subsequently be replaced with June 15, 2023. If you owe any penalties, they will also be computed using the extended date in June.

Note that tax filing dates are always the 15th of the month, unless that day falls on a holiday. In that case, the due is the next business day. Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, can be used to ask for an extension if you need additional time, but you must do so before June 15th.

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