Working Remotely for a Foreign Employer While Living in the U.S.: Tax Obligations

The SE tax problem

Why foreign employment often triggers self-employment tax

When you work for a U.S. employer, FICA is split: you pay 7.65% and your employer pays 7.65%. But a foreign employer with no U.S. payroll obligations generally does not withhold or pay the employer share of FICA. The IRS treats this gap in one of two ways depending on the arrangement:

• If you are classified as an independent contractor by the foreign company: you clearly owe self-employment tax at 15.3% (12.4% Social Security on income up to the wage base + 2.9% Medicare on all income) through Schedule SE.
• If you are classified as an employee but the employer has no U.S. presence: the situation is more nuanced. The IRS may still require you to pay self-employment tax because no employer is remitting the employer share of FICA. Consult a tax professional to determine the correct treatment for your specific arrangement.

In either case, you can deduct 50% of your self-employment tax as an above-the-line adjustment to income on your Form 1040. This partially offsets the double burden. Use our self-employment tax calculator to estimate your liability.

How to handle quarterly estimated tax payments

Without employer withholding, you must make quarterly estimated payments using Form 1040-ES. The payment schedule is:

To avoid an underpayment penalty, you generally must pay at least 90% of the current year's tax or 100% of the prior year's tax (110% if your AGI exceeds $150,000), whichever is smaller. Use our estimated quarterly tax calculator to plan your payments.

The totalization agreement exception

If your foreign employer is in a country with a U.S. totalization agreement, and you are covered by that country's social security system, you may be exempt from U.S. self-employment tax. You would need a Certificate of Coverage from the foreign country's social security agency proving that their system covers you. This is most common for workers who are temporarily assigned to the U.S. by a foreign employer but continue paying into the foreign social security system.

For workers who independently chose to live in the U.S. and work remotely for a foreign company, the totalization exemption may be harder to obtain because the foreign social security system may not consider you covered if you do not reside in their country.

State income tax obligations

You owe state income tax in the state where you physically perform your work. If you live and work remotely in Texas, Florida, or another no-income-tax state, you owe no state income tax. If you live in California, New York, or another state with income tax, you owe state tax on your foreign employment income at that state's rates, regardless of where your employer is located.

Your foreign employer will not withhold state taxes. You must make state estimated payments separately, using your state's estimated tax form.

Record-keeping without a W-2

Since your foreign employer does not issue a W-2, you need to maintain your own records. Keep documentation of:

• All payment amounts and dates received
• Currency exchange rates on each payment date (use a consistent source like the IRS yearly average exchange rates or a major financial data provider)
• Your employment contract or engagement agreement
• Any foreign tax paid, if the foreign employer withholds foreign income tax

Report your foreign employment income on Form 1040. If treated as self-employment income, use Schedule C. If treated as wages from a foreign employer, report on Form 1040 Schedule 1 line 8j (other income) — but consult a tax professional to ensure correct classification.

Common mistakes remote workers with foreign employers make

1. Not paying estimated taxes. Without withholding, your entire tax bill comes due at filing time if you do not make quarterly payments — plus a potential underpayment penalty.
2. Ignoring self-employment tax. Many remote workers focus on income tax and forget about the 15.3% SE tax, which can be a significant additional cost.
3. Not converting currency correctly. If paid in a foreign currency, you must convert to USD for tax reporting. Use the exchange rate on the date you receive payment, or the IRS yearly average rate for simplicity.
4. Assuming no state tax applies. Your physical location determines your state tax obligation, not your employer's location.
5. Not deducting the 50% SE tax adjustment. You can deduct half of your self-employment tax on Form 1040 line 15, reducing your adjusted gross income.

For more on self-employment tax mechanics, see our self-employment tax guide.