Deducting U.S. self-employment tax from German taxes?
Thread poster: Christopher Schmidt

Christopher Schmidt  Identity Verified
United States
Local time: 19:00
Member (2005)
German to English
+ ...
Jun 15, 2004

A question to fellow U.S. citizens working in Germany: does anyone know if it is possible to claim as a deduction on German taxes the 15.3% self-employment tax U.S. citizens are required to pay on self-employment earnings to the IRS?

Thanks
Chris


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Sherey Gould  Identity Verified
Local time: 17:00
German to English
is this not double taxation Jun 16, 2004

Hi Chris,
I lived in Germany for 12 years, first as an employee and the last six years as self-employed. While I was required to file a US return each of those years, I was never required to pay ANY sort of tax to the US while I earned money and paid taxes in Germany - self-employment or otherwise. All I had to do on the US return was declare the taxes I paid in/to Germany. Wouldn't what you're saying be considered (illegal) double taxation? Or have some laws changed in the past few years? (I moved back to the US in mid-2002.) This procedure (filing without being liable for any US tax) was based on information I received from an IRS representative who was made available to anyone who requested her services through the US Consulate in Munich.
I can't imagine you really have to pay ANY tax to the US whatsoever if you are paying all the taxes due in Germany...(?)


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Rebecca Holmes
United States
Local time: 19:00
German to English
$80,000 limit Jun 16, 2004

Hi Chris,
The current income limit which you can earn abroad without having to pay any taxes at all to the US is $80,000, I believe.
As a US citizen you are still required to submit a tax return (it is also a good idea in case you ever return to the US, you may need it to prove income level, etc.)to the IRS but if you are under the above limit you owe them absolutely nothing.
Hope that eases your mind!
Kind regards,
Rebecca


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Michele Johnson  Identity Verified
Germany
Local time: 01:00
German to English
+ ...
2 issues: income tax + self-employment tax Jun 16, 2004

Rebecca Holmes-Löffler wrote:
...to the IRS but if you are under the above limit you owe them absolutely nothing.
Hope that eases your mind!
Kind regards,
Rebecca


Rebecca, I disagree. I am not a tax professional, but as I understand it (and as explained to me by my US CPA) there are 2 issues: foreign earned income exclusion and self-employment tax. Sevenhertz may owe no INCOME tax if his/her income is below $80,000, as it says on the IRS website about the earned income exclusion:

http://www.irs.gov/publications/p54/ch04.html
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to $80,000 of your foreign earnings.

As a self-employed person, however, one is also liable for self-employment taxes:

http://www.irs.gov/publications/p54/ch03.html
Who Must Pay Self-Employment Tax?

If you are a self-employed U.S. citizen or resident, the rules for paying self-employment tax are generally the same whether you are living in the United States or abroad.
...
Example.

You are in business abroad as a consultant and qualify for the foreign earned income exclusion. Your foreign earned income is $95,000, your business deductions total $27,000, and your net profit is $68,000. You must pay self-employment tax on all of your net profit, including the amount you can exclude from income.

However, as part of tax treaties between countries, you can be exempted from social security taxes (in this case: self-employment taxes) in one country if you pay in the other.

http://www.irs.gov/publications/p54/ch03.html#d0e2478
Exemption From Social Security and Medicare Taxes

The United States may reach agreements with foreign countries to eliminate dual coverage and dual contributions (taxes) to social security systems for the same work. See Binational Social Security (Totalization) Agreements in chapter 2 under Social Security and Medicare Taxes. As a general rule, self-employed persons who are subject to dual taxation will only be covered by the social security system of the country where they reside.

Now as explained to me directly by the Bundesversicherungsanstalt für Angestellte, you can either pay into retirement in Germany, in which case they will issue you a certificate that will free you from paying self-employment taxes in the US, OR you opt out of the public retirement scheme here, in which case you are still liable for social security payments (in your case self-employment) in the US.

Sevenhertz, I would consult a German Steuerberater about to what extent you can deduct such payments from your income tax here.

[Edited at 2004-06-16 07:00]


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Rebecca Holmes
United States
Local time: 19:00
German to English
Self-employment tax = social security Jun 16, 2004

[quote]Michele Johnson wrote:
Now as explained to me directly by the Bundesversicherungsanstalt für Angestellte, you can either pay into retirement in Germany, in which case they will issue you a certificate that will free you from paying self-employment taxes in the US, OR you opt out of the public retirement scheme here, in which case you are still liable for social security payments (in your case self-employment) in the US.

Yes, that is entirely correct. I didn't realize that the self-employment tax Chris was referring to and social security payments were the same thing. I have to get a certificate from the Bundesversicherungsanstalt für Angestellte each year stating that I pay into German social security and include this with my US tax return. This then eliminates the whole issue.


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Michele Johnson  Identity Verified
Germany
Local time: 01:00
German to English
+ ...
Thanks Rebecca Jun 16, 2004

Rebecca Holmes-Löffler wrote:

Yes, that is entirely correct. I didn't realize that the self-employment tax Chris was referring to and social security payments were the same thing. I have to get a certificate from the Bundesversicherungsanstalt für Angestellte each year stating that I pay into German social security and include this with my US tax return. This then eliminates the whole issue.


OK! Now I understand. You are the first person I know who actually gets such a certificate so I'm glad you could confirm that.

Kind regards...
Michele


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Christopher Schmidt  Identity Verified
United States
Local time: 19:00
Member (2005)
German to English
+ ...
TOPIC STARTER
thanks for the info Jun 16, 2004

Thanks to everyone for the info.

I'm clear on the double-taxation issues as far as income tax goes. The issues surrounding social security taxes (self-employment taxes) paid to the US were a bit fuzzy though. I'll talk to my Finanzberater to see to what extent those payments can be deducted from German taxes. (As Rebecca pointed out, if you pay into the the German retirement fund, this isn't an issue.)

Chris

[quote]Rebecca Holmes-Löffler wrote:

Michele Johnson wrote:
Now as explained to me directly by the Bundesversicherungsanstalt für Angestellte, you can either pay into retirement in Germany, in which case they will issue you a certificate that will free you from paying self-employment taxes in the US, OR you opt out of the public retirement scheme here, in which case you are still liable for social security payments (in your case self-employment) in the US.

Yes, that is entirely correct. I didn't realize that the self-employment tax Chris was referring to and social security payments were the same thing. I have to get a certificate from the Bundesversicherungsanstalt für Angestellte each year stating that I pay into German social security and include this with my US tax return. This then eliminates the whole issue.


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Ralf Lemster  Identity Verified
Germany
Local time: 01:00
English to German
+ ...
Moving the thread... Jun 16, 2004

Hi all,
As the discussion stayed in English, I have moved the thread to Money Matters.

Best, Ralf


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