Tax Deductions for Expat Freelancers and Contractors: What You Need to Know

As an expat freelancer or independent contractor, you have the freedom to work from anywhere. But with that freedom comes the responsibility of managing your own taxes. Unlike employees, you must track your income, handle tax payments, and claim deductions yourself.

Tax deductions help reduce your taxable income, lowering the amount you owe to the IRS. If you take full advantage of these deductions, you could save thousands of dollars each year.

Freelancer vs. Independent Contractor: What’s the Difference?

At a glance, freelancers and independent contractors may seem different based on how they work, but from a tax standpoint, they’re the same.

A freelancer typically works with multiple clients at once, setting their own hours and rates. They may take on short-term projects, ongoing work, or retainer agreements. The term “freelancer” is often associated with creative and digital fields, such as writing, design, and consulting.

An independent contractor sometimes referred to as a 1099 contractor, also operates as a self-employed professional. Unlike freelancers, contractors often have structured agreements with clients, sometimes working on longer-term projects with more defined deliverables. This term is more commonly used in industries like construction, IT, and professional services.

However, in the eyes of the IRS, there’s no difference. Both freelancers and independent contractors are self-employed individuals who report income using Form 1099 instead of a W-2. They’re responsible for handling their own taxes, including self-employment tax, and don’t have employer-provided benefits. 

What Taxes Do You Need to Pay as an Expat Freelancer or Contractor?

Being self-employed means you don’t have an employer withholding taxes on your behalf. Instead, you’re responsible for paying taxes yourself, which can include:

Self-Employment Taxes

This tax covers the Social Security and Medicare taxes that are generally paid by employees and businesses. As an independent contractor, you must pay both the employer and employee portions of these taxes. The tax rate for self-employment is 15.3%, with 12.4% for Social Security and 2.9% for Medicare.

Federal Income Tax

Just like regular employees, you must pay income taxes on any income you receive from your business.  Your tax liability will be determined by your taxable income as well as other factors such as deductions and credits.

State and Local Taxes

In addition to federal tax, you may also be required to pay state and local taxes, such as state income tax or sales tax. This is especially true for expats who still maintain residency in a U.S. state such as New York and California.

Essential Tax Deductions for Expat Freelancers and Contractors

Here are some of the most important deductions available to self-employed Americans abroad:

• Self-Employment Tax – This IRS allows you to deduct fifty percent of the self-employment tax from your net income. This is because the IRS considers the employer part of the self-employment tax to be a business expense and lets you deduct it as such.
• Home Office – Whether you own or rent your home, you can take a home office deduction as long as it’s regularly and exclusively used for business purposes. With this deduction, you can deduct expenses for utilities, house repairs, and the maintenance of your home office. You may also be eligible to deduct rent, mortgage interest, and property taxes.
• Internet and Phone Bills – Your internet and phone expenses may be deducted if they are utilized for business purposes. However, the IRS requires you to deduct only the portion of these expenses that are directly related to your business activity. You can compute the percentage of time you use your internet and phone for business to see how much of those costs are tax deductible. For instance, you can deduct 60% of your internet cost as a business expense if you use the internet for work 60% of the time. This also applies to your phone bill.
• Health Insurance & Medical – If you pay for your own health insurance, you can deduct the cost of the premium as long as you are not eligible for a plan through your spouse’s employer. You can also deduct the premiums you pay to cover your spouse, dependents, and children under the age of 26, even if they aren’t tax dependents.
• Business Travel – If you take trips outside the general area of your home for business purposes, you can deduct travel-related expenses from your taxes. These expenses may include the cost of transportation, such as plane, train, or bus tickets, as well as taxis or rideshares during your trip. Baggage fees and car-related expenses such as rentals and parking fees may also be deductible. Additionally, the cost of lodging may also be included. 
• Business Meals – You are allowed to deduct business-related meals as long as they’re reasonable and essential, as well as directly tied to your business activities. You can deduct up to 50% of the total meal expense, including taxes and tips. 
• Vehicle/ Mileage Deduction – You can claim vehicle deductions when you use your car for business purposes, such as meeting with clients and attending seminars. You can use the standard mileage rate or the actual expense method to calculate your deductions.  The standard mileage rate is a fixed rate per mile set by the IRS each year that is used to calculate the deduction for total business miles driven. On the other hand, the actual expense deduction involves tallying up all of the expenses associated with driving a car for business purposes, such as gas, insurance, repairs, and depreciation.
• Advertising – You can deduct advertising or promotion expenses directly related to your business. This includes costs associated with promoting and marketing your services to potential clients such as running ads in newspapers or online, sponsoring events or social media posts, creating business cards or flyers, and more.
• Loan Interest – The interest paid on a bank loan is eligible for a business expense tax deduction. However, if you used the loan for both personal and business purposes, you could only deduct the interest related to the business portion.
• Education – If you take courses or attend seminars to maintain or improve your professional skills, you may be able to deduct the cost of those expenses from your taxes. This could include the cost of tuition, textbooks, and any associated fees.
• Start-up Cost – You can deduct up to $5,000 in start-up costs associated with launching your business. These deductions can offset the initial expenses of starting your independent contracting work. Some tax-deductible startup costs include research and planning, advertising, location scouting, and professional fees.
• Retirement Plan – Self-employment comes with the advantage of greater flexibility in selecting retirement plan options that suit your needs. Furthermore, you may qualify for tax deductions associated with your retirement plan contributions.
• Professional Publications and Subscriptions – For expat freelancers and independent contractors, it can be essential to buy publications and subscriptions to stay up-to-date with your industry and maintain professional skills. You can deduct expenses related to professional publications and subscriptions, such as trade publications, professional journals and magazines, online subscriptions, books, and periodicals related to your work. 
• Office Supplies – You may be eligible to deduct the cost of business-related supplies and materials that are considered regular and essential. This contains copy paper, stamps, paper clips, and pencils. In addition, books, instruments, and equipment used during the year may be deducted.
• Asset Depreciation – As a self-employed individual, you may be eligible for tax deductions for the depreciation of business-related assets. Depreciation is the gradual loss in value of an asset over time due to use or deterioration.
• Dependent Care – If you pay for childcare for your dependent, you can deduct the cost from your taxable income. This deduction is available to self-employed individuals with a dependent who is under the age of 13.

Maximize Your Deductions with Tax Samaritan

The IRS provides a variety of options to assist both new and seasoned self-employed individuals in minimizing their tax liability. By identifying the expenses and deductions that are available, expat freelancers and independent contractors can take advantage of them to lower their tax bill. After all, who wouldn’t want to reduce their tax burden?

If you’re unsure which tax deductions you can take or which approach to use, Tax Samaritan is here to help. Our experts have provided quality tax preparation services to expats since 1997. We ensure you don’t miss a single tax deduction so you can get the most savings from your taxes.  Contact us today and get a free tax quote.