Self employed expats can avoid US self employment tax via a great legal loophole.
This is done through forming a foreign corporation.
Since all income will be going through the corporation, which is looked at as an entity separate from the owner, the corporation can pay the owner a salary.
This is a great way to avoid US self employment tax, which is a major double taxation problem for expats in countries without a social security totalization agreement with the US, such as Israel.
In countries with a totalization agreement, social security taxes will only be paid to the country of residence. The US expat will not have to pay these taxes to the US government, only to the country of residence.
In addition, if the person worked at least six quarters in the US, they can use their foreign work years to complete their eligibility for US social security pension payments.
However, many countries, including Israel, do not have this agreement with the US. So, forming a corporation can be the best method to avoid this tax.
In addition, the expat can exclude the income from being liable to US income tax, up to $120,000 for 2023. In many instances, the foreign tax credit may be a better option, with the same result.
Being proactive with your tax planning to set up such a structure can be well worthwhile.
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