For U.S. citizens living abroad, self-employment presents unique tax and financial challenges. While living in countries such as New Zealand (NZ) and Australia (AU) offers business opportunities and lifestyle benefits, it also comes with a complex web of U.S. and local tax obligations. Understanding these implications is critical to maintaining compliance and optimizing tax efficiency.
- U.S. Tax Obligations for Self-Employed Expats
Worldwide Taxation
Unlike most countries, the U.S. taxes its citizens on their worldwide income, regardless of residency. This means that self-employed U.S. citizens in NZ or AU must report their foreign earnings to the IRS.
Self-Employment Tax (Social Security & Medicare)
One of the biggest burdens for self-employed U.S. expats is the Self-Employment Tax (SE tax). This tax consists of Social Security (12.4%) and Medicare (2.9%) contributions, totaling 15.3% of net earnings. Unlike regular employees, the self-employed must pay both the employer and employee portions.
- Australia: The U.S. and Australia have a Totalization Agreement, which helps eliminate double Social Security taxation. If an expat contributes to Australia’s Superannuation system, they may be exempt from U.S. SE tax.
- New Zealand: The U.S. does not have a Totalization Agreement with New Zealand, meaning U.S. citizens must pay both U.S. SE tax and New Zealand’s ACC and KiwiSaver contributions, leading to potential double taxation.
- Business Structure Considerations
U.S. expats in NZ and AU have several business structure options, each with tax implications:
- Sole Proprietorship: Simple but exposes them to full SE tax.
- Deemed Employee: Classification as a deemed employee may reduce the Self-Employment Tax liability.
- Limited Company (NZ) or Pty Ltd (AU): May reduce liability but requires additional tax filings.
- U.S. LLC: Many expats mistakenly assume an LLC is tax-efficient abroad, but it may create double taxation if local authorities do not recognize it.
- FBAR & FATCA Reporting
Expats must comply with U.S. foreign account reporting laws, including:
- FBAR (FinCEN Form 114): Required if combined foreign accounts exceed $10,000.
- FATCA (Form 8938): Additional reporting if foreign assets exceed $200,000 (for single filers abroad).
- Local Tax & Compliance Requirements
- New Zealand: Requires self-employed individuals to register for GST (Goods and Services Tax) if revenue exceeds NZD $60,000 annually. ACC levies also apply.
- Australia: Self-employed expats must register for an Australian Business Number (ABN) and may be subject to GST (if revenue is over AUD $75,000).
Conclusion
Self-employed U.S. expats in New Zealand and Australia face complex tax obligations but can manage liabilities by using tax treaties, exclusions, and proper business structures. Careful planning is essential to avoid penalties and minimize double taxation.