How to get out of 100% of US self employment tax: (Sorry, expats only)

How to get out of 100% of US self employment tax: (Sorry, expats only)

A solution even better than an S-corp:

As we all know, US self employment tax can be a real killer. Especially for expats living in a country without a totalization agreement with the US, this results in double taxation.

For instance, for someone living in Israel, self employed: Besides Israeli income tax, they are liable for Israeli social security tax (9-17%). US self employment tax is 15.3%.

Add to that 17% Israeli VAT (sales tax), which is more of a tax on the seller than the buyer (even though it doesn't look that way).

Total 49% effective tax rate. That's before calculating income tax, which can be effectively around another 15% if you make $60k a year! A 75% tax on your earnings! Is it even worthwhile to work?!

Here is the solution, to at least get out of the US self employment tax:

Form a foreign corporation, have all payments paid to the corporation. Pay yourself a salary. For the tax year 2022, $112,000 can be excluded from income tax, using the foreign income exclusion.

Of course, if you live in Israel or another higher tax country than the US, the foreign tax credit will be a better option, and will cause you to pay $0 US income tax.

There will be no US self employment tax; you're simply looked at as being an employee of the foreign company.

In addition, there is no need to form a corporation in the country you reside in. You can choose to form a corporation in a country with low cost and little bureaucracy.

Though in some instances a corporation in your country of residence would be the best option.

Form 5471, a report of foreign corporation will need to be filed each year with the US.

As well as reports to your country of residence.

While the extra reporting can be costly to pay an accountant to take care of, the tax savings can make it well worth it.

However, the feasibility of this solution really depends on your income level, type of occupation, and numerous other factors.

A projection needs to be made to see if it will be worthwhile.