Can self-employed expats claim FEIE?

Yes, self-employed US expats can claim the Foreign Earned Income Exclusion on their net self-employment income earned abroad. However, there are important nuances that self-employed individuals need to understand.

Your FEIE-eligible income is your net earnings from self-employment — gross self-employment income minus allowable business deductions. You claim this on Form 2555 just like an employee would claim their salary. The same qualifying tests apply: you must have a foreign tax home and meet either the Physical Presence Test or the Bona Fide Residence Test.

The critical caveat for self-employed expats is that the FEIE only excludes income from federal income tax. It does not reduce self-employment tax (SE tax), which covers Social Security (12.4%) and Medicare (2.9%) for a combined rate of 15.3% on the first $168,600 of net earnings (2024), plus 2.9% Medicare on amounts above that, plus the 0.9% Additional Medicare Tax on amounts above $200,000.

This means that even if you exclude all your income from income tax using the FEIE, you may still owe a significant amount in self-employment tax. For a freelancer earning $100,000 abroad, the SE tax could be approximately $14,130 even with zero income tax owed.

There is an exception: if you work in a country that has a Totalization Agreement with the United States (currently about 30 countries, including Canada, UK, Germany, Australia, Japan, and others), you may be exempt from US self-employment tax if you are paying into the foreign country's social security system. You would obtain a Certificate of Coverage from the foreign country to demonstrate this.

Self-employed expats should also explore whether the Foreign Tax Credit might be more beneficial than the FEIE, as it can offset both income tax and, in some cases, self-employment-equivalent foreign social taxes. We analyze both options for every self-employed client.