Owing self-employment tax to the U.S.

62 posts in this topic

Posted

Hi Everyone,

I read as many earlier posts as I could find but I didn't see this exact question asked.

As I'm filling out my first ever IRS forms from Germany, I thought it was clear that

self-employed persons still are responsible to pay self-employment tax (schedule SE),

but then I discovered a paragraph in the SE instructions that makes the issue a bit

foggy, it says:

"If you are a self-employed U.S. citizen or resident alien living outside the United States,

in most cases you must pay SE Tax. (then next paragraph it says) "Exception. The United States has

social security agreements with many countries to eliminate dual taxes under two social

security systems. Under these agreements, you must generally pay social security and

Medicare taxes to only the country you live in."

And then it lists Germany as one of these countries.

So I'm a bit confused. Since I only got permission last summer to work in Germany

I only have about 5000 Euros of income. So I will not owe any income tax in either Germany

or the U.S., but usually I would have to always pay the 15% self-employment tax in the

U.S. and it seems as though I should now too, except that it says something about this

treaty exception. So do I pay, and to whom?

I'm sure others who have been here a while have had to deal with this, can you help

me figure out what I really need to do here in Germany about this.

Many thanks.

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Posted

File taxes in Germany and files taxes in the US. Pay nothing in Germany (you made too little) and exclude everything (exclusion credit) from the US. In other words, you pay no taxes.

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Posted

Take a look at Publication 54 for future years' reference to see if this specific situation is addressed, especially with regards to tax credits from the US for taxes paid to Germany. IMHO (I am not a tax accountant) you do not have to pay US self-employment taxes when your tax home is here and you are paying into the German system.

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Posted

Thanks,

And Yes, it's correct that I don't have to pay income tax on only 5000 Euros, but the 15%

self-employment tax that is always due on anything over $400 is what I'm trying to figure

out what to do about.

And there's the paragraph a little furthur down on the Schedule SE instructions that says:

"If your self-employment income is exempt from SE tax, you should get a statement from the

appropriate agency of the foreign country verifying that your self-employment income is

subject to social security coverage in that country."

And so I'd love to hear from some self-employed or freelancers here who have actually filed

their U.S. taxes and could tell me how they actually did this. It seems that I'm supposed to

include this declaration with my 1040, C and SE forms when filing, is this what you've had to do,

and who did you get it from, and could you get it before your 1040 was due?

And a completely separate but related observation appears: Does this mean that I start to collect

German social security when I reach retirement? Somehow I thought I'd still be getting it from the

U.S. even though I live over here. Anyone know about this?

Thanks for all your help. And I'm guessing others will be interested in these questions too.

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Posted

Conquistador thanks, that document helped a lot. It describes the document that I need to prove

that I am paying into German social security. So tomorrow I will have a friend try to contact what is

described in the document as the "German Sickness Fund that collects your German Social Security taxes".

Did you, or anyone reading this, experience getting this document as easy or difficult, especially since

I have not yet made any payments to them yet? My first payment will be in the next couple of months

after the Finanzeamt approves my tax filing. The publication Conquistador linked to says I have to

attach a copy of this to my 1040.

I'm so happy to find this site with all of you who have been through the mill already. None of my

German friends know any of this stuff because it only affects us foreigners.

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Posted

Well, it's becoming clearer, but I'm still trying to figure out how exactly to do

what supposedly is required.

I need to pay Social Security here and send proof of that with my 1040 instead

of sending form SE (self-employment tax).

I did some calling around today and it seems that in Germany it's the BFA

(Bundesversicherungsanstalt fuer Angestellte) that is in charge of the

Pension or "Rente", but as I inquired more they say that it is only for

employed people, not for self-employed.

Does anyone know if I just got an unimformed beamter there, or if I just

have the wrong organisation I'm asking. The IRS and SSA in America are

pretty clear that I need to send them this declaration instead of the

form SE, so I would really like to hear from any of you how you are doing

this. It's not as simple to do as it seems to be described. Thanks.

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Posted

Although this thread is old and the author has probably solved the problem, I thought I'd respond to this for everyone else out there who encounters this.

What the poster needs is a completed "Vordruck D/USA 101" from the Deutsche Rentenversicherung (DRV Bund). This is a one-page document that serves as proof to the IRS that a US citizen is participating in the Germany social security system (namely, the Deutsche Rentenversicherung). The form is only issued *retroactively*, that is, you cannot get a form for calendar year 2011 until Jan 1, 2012. However, there seems to be no limit on how many years the form will cover retroactively, as long as you have participated in the German system during that time. I got mine for the previous four years.

As far as I know, this form is only available from the DRV-Bund or one of the other public pension providers. A Privatrente - private pension - is not enough, it has to be a public one.

However, as you might guess, to get the form, you have to actually pay into the DRV public pension system. This makes sense, because if you don't make payments, you aren't covered by the German system. You will need a Sozialversicherungsnummer and will have to have made contributions (Rentenbeiträge) to the DRV. You pay into the DRV system in one of two ways:

1) If you are employed as an Angestellter, either full time or part time, you will automatically make contributions to the public health insurance and pension systems and should already have a Sozialversicherungsnummer - they are deducted from your paycheck. This is the ideal way, if you can manage get a small job on the side (it must pay more than 400€ a month!) and you'll be set.

2) If self-employment income is your only source of income, that is, you have no income at all from "normal" employment as an angestellter, you will have to make voluntary contributions to the DRV. This is relatively easy to do - you file a form to start making contributions. The minimum contribution in 2012 is 78,40 EUR a month. You can pay contributions retroactively, but must make all contributions for a calendar year by around April 1st of the following year (That is, all contributions for 2011 must be paid by April 2, 2012) **This deadline changes year to year**. I assume that they will issue you a Sozialversicherungsnummer if you voluntarily contribute.

More information about how to voluntarily contribute:

http://www.deutsche-rentenversicherung.de/cae/servlet/contentblob/232670/publicationFile/38301/freiwillig_rentenversichert_ihre_vorteile.pdf

The Wikipedia entry:

http://de.wikipedia.org/wiki/Freiwillige_Beitr%C3%A4ge

Making voluntary contributions is a good idea anyway, as you must have paid into the system for 60 months to get a permanent residence permit (Niederlassungserlaubnis) in Germany.

So, once you have made your contributions for a year, you request a Vordruck D/USA 101 by sending the DRV a letter requesting that they issue one. You need to include in the letter:

1) Your Sozialversicherungsnummer

2) Proof of your contributions to the DRV for the time concerned (they should have this on file but you never know...) These can be pay statements or, if you voluntarily contribute, they typically send you a statement at the end of the year.

3)A description of your self employment, including the address; for example:

Jane Doe

Freelance Journalist

Unter den Linden 9

10099 Berlin

this should be the same as the description of your self-employment activities that you provide to the IRS!

It often takes them months to issue the form - in my case it took four. So you should request it as soon as possible. You also have request a new form each year, covering the previous year. If the information doesn't change much, they issue these annual letters much faster than the first one, in my experience.

Once you have Vordruck D/USA 101 (it's bilingual), you can include a copy with your US tax return and are exempt from US self employment taxes.

Hopefully, this information is helpful to all of those expats out there trying to work their way through the maze of US taxes on citizens living in Germany.

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Posted

Excellent info, expat71, but any self-employed US citizen resident in Germany should look into whether or not they are required to pay US self-employment taxes when not required to pay into the German public pension system.

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Posted

As a self-employed US citizen resident in Germany, my experience is that the only way to get out of paying US self-employment tax (Form 1040, Schedule SE) is to provide the IRS with a Vordruck D/USA 101 instead of schedule SE along with your yearly tax return, and the only way to get a Vordruck D/USA 101 is to pay into the German system as I described above.

This is corroborated by what Tallfellow was told by the IRS and Social Sec. Administration:

"I need to pay Social Security here and send proof of that with my 1040 instead

of sending form SE (self-employment tax)...The IRS and SSA in America are

pretty clear that I need to send them this declaration instead of the

form SE..."

My personal experience backs this up: the IRS will make you pay self-employment tax on any self-employment income a US citizen earns in Germany, even if you take the foreign earned income exclusion (Form 2555) on that income.

In other words, if you are self-employed, you either have to pay into the German system (and then get your Vordruck D/USA 101) or pay self-employment tax. There is, to the best of my knowledge, no way to avoid paying self-employment tax without paying into the German public system. If anyone else has done it otherwise, I'd love to hear about it.

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Posted

Mine is no expert opinon, but, AFAIK, you cannot voluntarily opt to contribute to the German system in lieu of the US system and will only get the exemption from the IRS if you provide them with proof you are required to pay into the German system, and being required to pay into the GErman system currently depends on your freelance profession, e.g., all teachers are required to pay into the German system and thus would be exempt from paying US self employment taxes. Furthermore, the 2555 form applies only to income earned as an employee, not from self employment.

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Posted

Sorry, I have to contradict you again.

"Furthermore, the 2555 form applies only to income earned as an employee, not from self employment."

This is simply wrong. I file form 2555 every year and exclude my income (I'm self employed). I've been doing it for years. Perhaps you mean that you can't file Form 2555-EZ, which is just the short version of 2555. See the instructions for form 2555 at http://www.irs.gov/pub/irs-pdf/i2555.pdf. Self-employment comes up several times. See also http://www.greenbacktaxservices.com/blog/expat-taxes-explained-form-ez-for-foreign-earned-income-exclusion/ and http://taxes.about.com/od/taxhelp/a/ForeignIncome_5.htm

"You cannot voluntarily opt to contribute to the German system in lieu of the US system". Sure you can. That's what I do. The DRV doesn't care what my profession as long as I meet their standard of being a freelancer and not an employee. And the IRS is fine with it when I provide them the D/USA 101. If you are legally resident in Germany and are earning self-employment income there, you can file a request to make voluntary contributions to the Deutsche Rentenversicherung as I specified above. I do that.

The only exceptions in this case could possibly be that 1) you are not a legal resident of Germany in the eyes of the IRS (you meet neither the bonafide residence test nor the physicial presence test) or 2)all of your self-employment income is from clients in the US or US government clients. In regard to case 2, I am not sure if this is a problem because my self-employment income is all from German sources.

"All teachers are required to pay into the German system"

If they are angestellt, yes. All angestellte are required to pay into the German system. But the question is about self-employment income. If a teacher is freiberuflich, i.e. self-employed, this is not true. I've worked as a freelance teacher and did not have to pay into the German system (although I chose to anyway).

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Posted

@ expat71: as Panda has already said: everyone who is self-employed in Germany in a teaching occupation (that can include, btw. such things as Golf-pro or Yoga teacher) is legally required to put around 19% of his gross income (up to a certain limit) into the German public pension system. It is a stupid and very old law but it gets enforced every now and again by the Bundesrentenanstalt and then they can back-charge you up to 5 years based on your taxable income. Some people have one thru this nasty surprise as some reports on Toytown show.

Cheerio

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Posted

I'm expecting to start working in January 2013 and might make about 1000-1500 euro per month as a freelance designer, and am not required to pay into the German social security system.

From the previous posts, someone said that it's possible to voluntarily pay into the German social security system of minimum 78.40 euro per month to avoid paying for US SE tax. If so, this would be something like 8% of approximately 1000 euro/month income vs the US 13.3% SE tax, something like a 700 euro savings. If so, this would be better? What's the benefit of German VS US SS/Medicare? I'm only just starting to learn German though, so I'm a bit worried about the extra paperwork involved, especially after seeing how long it's taking to complete my visa application.

If I start working soon, it will be the first time filing Schedule C and SE. One issue I'm going to face is that I am planning to work with a German company that wants to start a Kickstarter project, and wants me as a US citizen to open an Amazon US Payment account to receive project funding from Kickstarter. According to the new regulations, services like Amazon and Paypal now have to report 1099-K forms to the IRS if your account has more than 200 or $20,000 transactions. I would think a Kickstarter project would get more than 200 backers. From what I've read so far, the 1099-K gets entered in line 1a on 1040-C, but I'm not sure.

We'll be manufacturing products in a German factory, and most of this money will need to be moved from the US to Germany to pay for the production. I only keep a little bit of it for the small part of my work. I wonder how and where I would deduct this movement. Also, I'm not sure if the little part I keep can be excluded with the Foreign Earned Income Exclusion, although I would assume so, since I'm doing the work in Germany. I wonder what happens if the Kickstarter project ends up with less than 200 backers or $20,000 and a 1009-K isn't issued.

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Posted

I am planning to work with a German company that wants to start a Kickstarter project, and wants me as a US citizen to open an Amazon US Payment account to receive project funding from Kickstarter. We'll be manufacturing products in a German factory, and most of this money will need to be moved from the US to Germany to pay for the production. I only keep a little bit of it for the small part of my work.

I wonder if using my US account to facilitate a $20,000 movement of money from the US to my German project partner, while keeping only lets say $2000 for compensation for my work on the project, if the $20,000 counts towards my 17,500 euro VAT registration? I wonder where this $20,000 gets reported on my German tax return, and how I can remove the forwarded $18,000 from my tax liability, because it is not my money. I don't want to have to register for VAT.

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Posted

@expat71:

"There is, to the best of my knowledge, no way to avoid paying self-employment tax without paying into the German public system. If anyone else has done it otherwise, I'd love to hear about it. "

OK. Now hear this:

US tax law (IRC § 1401©), exempts from US self-employment tax, SE income that is "subject to" the social security system of a country with which the US has a social security "totalization" treaty. IRS regs require the eligible taxpayer to submit a "certificate of coverage" from that US treaty partner. There is no obligation to actually pay into the foreign system provided that you are "subject to" or "covered by" that system; e.g. by virtue of residence, etc.. Neither of these phrases equates to "obliged to pay into".

Your advice to obtain the Vordruck from the DRV attesting to the fact of your coverage under the German system is correct and good advice (although as a practical matter the IRS almost never insists on seeing it).

You will, find, however, that those self-employed persons who apply for the German certificate of coverage will get the certificate of coverage (in about 4-6 weeks after they apply) regardless whether they have actually paid a single Euro cent into the German social security system.

That includes persons like myself who have been self-employed in Germany since 1986, have always reported every cent of ALL my income to the US including self-employment income, and have never paid a cent in US self-employment tax on any amounts earned in Germany because I have always been entitled to the certificate of coverage.

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Posted

I'm an American citizen working as a freelancer in Germany, and in the process of trying to catch up with taxes etc, I sent the following letter to the Deutsche Rentenversicherung - Bund and got the D/USA 101-A back about two weeks later without any problems. I've never registered or paid into the German pension system. According to my tax advisor, this should free me from the SE tax since (at least my kind of) freelancers are not required to pay into the pension fund in Germany.

MY NAME

MY ADDRESS

CITY, den TT.MM.JJJJ

Deutsche Rentenversicherung - Bund

BKZ 5017

10704 Berlin

Betreff: Versicherungsbescheinigung gem. Art. 6.1. des Abkommen

Sehr geehrte Damen und Herren,

in obiger Angelegenheit bitte ich um das Formular D/USA 101-A für:

Name: MY FULL NAME

Staatsangehörigkeit: amerikanisch

Amerikanische Sozialversicherungsnummer: MY SSN

Deutsche Steuer-Nr: GERMAN TAX NUMBER

Deutsche Versicherungsnummer: (keine)

Ständige Anschrift: MY ADDRESS

Tätigkeit: MY PROFESSION

Geschäftsanschrift: MY ADDRESS

Geburtsdatum: TT.MM.JJJJ

Geburtsort: MY BIRTHPLACE

Zeitraum: von TT.MM.JJ bis 31.12.2011

Mit freundlichen Grüßen,

MY NAME

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Posted

So the D/USA 101 is retroactive only?

To get one which covers the entire year of 2013, I'd have to apply after Jan. 1st 2014?

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Posted

So some of the posters above are saying you can get out of paying into both the German retirement and the American retirement with a piece of paper? I'd really love to believe that.

Sure you can probably get away with not paying American SE tax by saying that you're "covered" by the German tax. And then only if you're audited or some day want to claim American SS--when they actually ask for how much you paid into the German system in order to calculate what you get out--will you be hit with a really big bill.

My tax account explained it to me this way: As a freelancer I couldn't opt to pay into German retirement instead of American SS just to save money. The IRS would just want the difference (if they ever catch me, that is). As a freelance writer I'm not required to pay into German retirement. But once I became covered under the KSK, which requires that I pay into German retirement as a condition of coverage, I then didn't have to pay American SE tax.

I'm curious to know what happens to freelancers here when they retire and haven't paid into the system. What if they can't survive on their savings. Will the government end up covering them anyway on the dole?

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