Living and working abroad can be an exciting and rewarding experience—but it also brings important tax considerations. Understanding how U.S. tax rules apply to expats is crucial for avoiding surprises and maximizing benefits.
Living and working abroad as a U.S. citizen comes with a unique set of financial opportunities—and responsibilities. One of the most commonly discussed tax benefits for expats is the Foreign Earned Income Exclusion (FEIE), which allows qualifying individuals to exclude a portion of their foreign income from U.S. taxation. For tax year 2025, that amount is indexed for inflation and will likely exceed $120,000.
However, many self-employed Americans abroad misunderstand how this exclusion applies to their situation. While the FEIE can reduce or eliminate your income tax liability, it does not exempt you from U.S. self-employment tax. This article explores the relationship between the FEIE and self-employment tax, clarifying what you still owe and how to plan effectively.
What Is the Foreign Earned Income Exclusion (FEIE)?
The Foreign Earned Income Exclusion is a tax benefit available to U.S. citizens and resident aliens who live and work abroad. If you meet certain conditions, like passing the Physical Presence Test or the Bona Fide Residence Test, you may qualify to exclude a portion of your foreign-earned income from U.S. federal income tax.
To claim the FEIE, you must:
- Have foreign earned income (wages, salary, or self-employment income from services performed abroad)
- Have a tax home in a foreign country
- Meet either the Physical Presence Test (330 full days in a 12-month period abroad) or Bona Fide Residence Test (reside in a foreign country for a full tax year)
You must file Form 2555 with your tax return to claim the exclusion.
What the FEIE Does Not Cover ─ Self-Employment Tax
Here’s where things get tricky: The FEIE applies only to income tax, not self-employment tax.
If you are self-employed, you are subject to Self-Employment Contributions Act (SECA) taxes, which are the self-employed equivalent of Social Security and Medicare taxes. As of 2025, the self-employment tax rate is 15.3% on net earnings up to the Social Security wage base (approximately $168,600 for 2024, adjusted for inflation) and 2.9% for amounts above that.
Example:
Let’s say you earn $100,000 as a freelance consultant abroad:
- You may be able to exclude $100,000 of that income from income tax using the FEIE.
- But you’ll still owe 15.3% in self-employment tax on the $100,000.
That’s $15,300—even if you owe $0 in income tax.
Why Doesn’t the FEIE Cover Self-Employment Tax?
The short answer: because income tax and self-employment tax are separate.
The Foreign Earned Income Exclusion is part of the Internal Revenue Code dealing with income taxation. Self-employment tax is part of the U.S. Social Security and Medicare system. There’s no provision in the law that allows self-employed individuals to use FEIE to eliminate their obligations to contribute to these programs.
How to Reduce Self-Employment Tax Liability
Although FEIE doesn’t reduce self-employment tax, here are some strategies that might:
1. Set Up a Foreign Corporation
In some cases, forming a foreign entity (like a limited company or corporation) and paying yourself a reasonable salary could help reduce SE tax exposure. However, this approach comes with additional filing obligations, such as:
- Form 5471 for controlled foreign corporations (CFCs)
- Form 8938 (FATCA)
- Corporate taxes in your country of residence
This option is best considered with a tax advisor familiar with international tax structures.
2. Maximize Deductions
Self-employed individuals can deduct business expenses, which reduces net self-employment income—the figure used to calculate SE tax. Properly categorizing and documenting business expenses is crucial.
3. Totalization Agreements
If you’re working in a country with which the U.S. has a Totalization Agreement, you may be exempt from U.S. self-employment tax. These agreements prevent double taxation of social security-type taxes. You would pay into the foreign country’s system instead.
Countries with Totalization Agreements include:
- United Kingdom
- Canada
- Australia
- Germany
- France
- South Korea
To claim the exemption, you typically need to obtain a certificate of coverage from the foreign country’s social security authority.
What About the Foreign Tax Credit?
Another strategy for managing your overall tax liability is to use the Foreign Tax Credit (FTC). If you are paying self-employment or income taxes to your country of residence, you may be able to apply those taxes against your U.S. tax liability using Form 1116.
Unlike the FEIE, the Foreign Tax Credit can apply to self-employment income. However, it doesn’t reduce self-employment tax directly—it applies to income tax. Still, it may allow you to forego the FEIE in favor of a more comprehensive credit.
Some taxpayers opt to revoke FEIE and use only the FTC, especially in high-tax countries.
Reporting Requirements
Claiming the FEIE and managing self-employment taxes also involves meeting strict IRS filing requirements:
- Form 2555 – To claim the FEIE
- Schedule SE – To calculate self-employment tax
- Schedule C – To report business income and expenses
- Form 1040 – Main tax return
Failure to file can result in significant penalties and loss of eligibility for exclusion.
Final Thoughts
The Foreign Earned Income Exclusion is a powerful tool for reducing U.S. income tax, but it does not eliminate your responsibility to pay self-employment tax. For self-employed expats, this often comes as a surprise and can lead to costly misunderstandings.
To ensure full compliance and avoid unexpected liabilities, it’s essential to:
- Understand what the FEIE covers—and what it doesn’t
- Explore strategies to reduce SE tax legally
- Keep detailed records and file all required forms
For optimal results, working with a tax advisor who specializes in expat taxation is highly recommended.
Even as the tax landscape evolves, staying informed and proactive can help you take full advantage of legal exclusions while avoiding costly mistakes.
