as a independent contractor for an overseas job what is my tax obligation and percentage?

Question

I'm going to work overseas for a company who says I will have to pay all taxes, I am going for 3 months periodsbwith one month in between. what taxes and where can I find the info.

Answer 1

There are two major issues here, the fact that you will be self-employed, and the fact that your income will be foreign earned income.

As a self-employed person, you will file Schedule C. Keep track of all unreimbursed expenses (such as travel to the work site, housing etc). You will be subject to Social Security of about 12% of your net income up to $97,500 and 3% for Medicare with no upper limit. There is no way around that, so hold back 15% of your income for that purpose, and submit at least this amount quarterly as estimated tax payments. Get form 1040-ES here:

http://www.irs.gov/pub/irs-pdf/f1040es.pdf

Your income may be wholly or partially excluded from income tax from the federal earned income tax exclusion. This income excluded can be as high as $85,700. It is based on not only your income, but the number of days you are working. So you must keep track of that. You can read about this exclusion here:

http://www.irs.gov/businesses/small/international/article/0,,id=96817,00.html

If you are going to be making more than $85,700 on your assignment, have your situation reviewed by a tax person before you go, as you may owe significant taxes and need to send in additional estimated taxes quarterly.

I recommend that you have your taxes done by someone familiar with both self-employment and the foreign earned income exclusion, because there is a potential for some large mistakes on this type of return.

Answer 2

To expand upon what ninasgramma said about the FEIE, you probably will not qualify for that. You must meet either the foreign residence test or the physical presence test. The foreign residence test is met if you have a bona-fide residence in a foreign country all year. The physical presence test is met if you are physically present in a foreign country for at least 330 days in any period of 12 consecutive months.

If you return to the US during your one month breaks you will not meet either of those tests and the FEIE will not be available to you. If you remain overseas during your breaks and spend no more than 35 days in transit over international waters AND/OR in the US during any 12 consecutive month period then you probably will meet the physical presence test and could claim the FEIE. Watch out for the time in transit if you spend near the full 30 days in the US. Time spent in flight or aboard ship does NOT count towards the 330 days for the physical presence test! I know folks who have lost the FEIE due to that!

If you are not eligible to claim the FEIE, you CAN claim a credit for any foreign income taxes paid against your US tax liability. You can also claim that credit instead of the FEIE if it results in lower total tax liability for you. This can be the case if you will be working in some European countries where the income taxes are higher than in the US.

That brings me to the issue of any foreign taxes due. It's entirely possible that you may have to pay taxes in the country where you are working. Depending upon the type of work that you are doing you might be covered by a tax treaty that exempts you from the local taxes where you are working but that is the exception to the rule unless you are a teacher or certain professionals such as doctors, etc. It varies by country so you'll need to research this fully! It would be wise to contact the Embassy or Consulate for the country or countries where you will be living and/or working for advice on their tax laws.

The advice to consult with an expert is well given. Working overseas can be fascinating, I've done it myself. But dodging the bullet at tax time can be a massive exercise in frustration and seriously damaging to your wealth if you get it wrong. I messed up German tax returns 2 years running. The complexity of German tax law makes ours look like a walk in the park. And that's if your fluent in German; mine is rather pitiful. I got hit with several thousand D-Marks in taxes and penalties after fouling it up. I did get the penalty reduced, the gal at the Finanzamt was merciful and I think she liked Americans, but it was still an expensive lesson.