Monday, January 14, 2013

Self-Employed US Expats

Home Sweet Studio
Home Office photo by geishaboy500
Today's post is US-centric again, I'm afraid. My apologies to all of my non-US readers.

According to one expat survey I've read, almost 25% of US expats (who responded to the survey) are self-employed. I find this number astonishingly high given that other countries don't hand out work permits for self-employed people, though the Dutch-American Friendship Treaty is an interesting counter-example. What would surprise me, however, is most expats abroad knowing about the self-employment tax. When most didn't know about the US's curious citizen-based taxation system, they would probably be astonished to find out that if they're living and working abroad, self-employed US expats still have to pay an extra 15.3% of their income to the US to cover Medicare and Social Security.

If you plan to return to the US at some point, this is fine. However, if you're a permanent expat like myself, this is particularly galling because you're required to pay for Medicare, but you're not allowed to use it. Additionally, if you collect a foreign pension, your Social Security benefit gets cut. Never mind that you paid for that Social Security benefit; as far as the US is concerned, you're a filthy-rich expat trying to take advantage Uncle Sam. Personally, I think that if the US government explicitly denies me services because I live abroad with my wife and daughter, they shouldn't be charging me for said services, but what do I know?

It gets even worse when you realize that you may be paying for identical benefits in the country you're living in. However, the US has a handful of Totalization Agreements designed to avoid double-paying Social Security. These are mostly with European governments, so if you live elsewhere, tough luck. I cannot help but wonder if the US government has ever commissioned a study showing how much they spend to enforce and to offset the damage of our unique citizen-based taxation scheme relative to the income generated.