For many, the idea of living abroad is a life-long ambition. But with financial and work commitments keeping them behind, this ambition can seem more like an unachievable fantasy.
Thankfully, many U.S. expats are able to support themselves financially through workabroad programs, with some of the most common ones being overseas contractor jobs. As a contractor, it gives you more mobility and flexibility, while also ensuring the hiring company has less paperwork.
Nevertheless, even though the prospect of working in a country with no income tax, like the UAE, Qatar, or Saudi Arabia, may appear to be the opportunity you’ve been waiting for, it’s important to understand that you still need to comply with U.S. tax regulations.
So to help you understand just what’s involved in overseas contract jobs and what perks you may be entitled to, we’ve put together some important factors you’ll need to think about:
1. You Still Need to File U.S. Taxes for Workabroad Schemes
Regardless of where you’re residing, if you’re a U.S. citizen or green card holder, it’s still your responsibility to file U.S. taxes if you meet the lowest threshold (for self-employed contractors this is $400). This means you need to declare the income you’ve received from work abroad programs and must file this by June 15th every year – or you can have until October 15th if you request an extension.
2. You Could Be Entitled to Some Tax Exemptions
Just because you’re filing U.S. expat taxes, this doesn’t automatically suggest that you owe taxes. That’s because you may be entitled to a number of different tax exemptions if you pass the physical presence test. This stipulates that, for 330 full days over 12 consecutive months you must have been residing in a foreign country (or countries). These 330 days don’t have to be consecutive.
The physical presence test is often the easiest way to qualify as a U.S. expat as the bona fide residence test often proves too difficult for U.S. contractors. This is because the IRS presumes that as soon as your contract expires, you’ll return to the U.S., and the test stipulates that you should have no intentions to return.
The tax exemptions you may be eligible for if you pass one of these tests is the Foreign Housing Credit, the Foreign Tax Credit, and the Foreign Earned Income Exclusion (FEIE). For instance, the latter excludes a certain amount of income earned in a foreign country from U.S. tax liability – this was $100,800 in the 2015 tax year. However, even though you may be exempt from federal taxes, paying self-employment taxes may still be a requirement.
3. You Must Report Any Financial Accounts You Have Abroad
As well as declaring your income taxes, you’ll also need to report any foreign accounts you have that contain $10,000 or more (this is cumulative). An FBAR Form must be submitted by June 30th to the U.S. Department of the Treasury (you can do this online). No extensions are available for this.
4. You May Need to Pay Additional Taxes
It’s highly likely you’ll be deemed “self-employed” when you embark on contract world jobs and, therefore, will have to pay Medicare and Social Security (standard U.S. self-employment taxes). This includes both the employee and employer portions of tax and may include estimated taxes as well. Any missed payments could result in a hefty penalty, which is why it’s a good idea to speak to a tax professional who specializes in expat incomes.
5. You Should Track All of Your Expenses and Income
Finally, to make sure you’re always on top of your finances, it’s a good idea to document all of your income and expenses, particularly as countries without income taxes won’t record your earnings. A straightforward way of doing this is to create a spreadsheet, detailing how much you’ve earned, when the payment was received, and what the U.S. exchange rate was at the time.
Try to keep on top of this on a day-to-day basis so you’re not left with a lot of bookkeeping to do toward the end of the tax year. It’s a good idea to save hard copies, too, e.g. bank receipts or pay stubs, as these may come in useful if you hire someone to help you with your tax returns.
When you first consider workabroad programs, all of the taxes and legalities involved can seem a little overwhelming, especially when you might have to deal with taxes in two different countries! However, with some prior understanding, careful bookkeeping, and advice from a tax professional, declaring your foreign income shouldn’t be too difficult at all. Then, in no time at all, you can enjoy the dream of working and living abroad – and without the risk of not paying all the right taxes!