Self-Employment Tax

Self-employment tax is the social security and Medicare taxes for individuals who are self-employed. Nonresident aliens are not subject to self-employment tax. Residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are considered U.S. residents for this purpose and are subject to the self-employment tax.

Resident aliens must pay self-employment tax under the same rules that apply to U.S. citizens. However, a resident alien employed by an international organization, a foreign government, or a wholly-owned instrumentality of a foreign government is not subject to the self-employment tax on income earned in the United States.

Self-employment income you receive while you are a resident alien is subject to self-employment tax even if it was paid for services you performed as a nonresident alien.

Example.   Bill Jones is an author engaged in the business of writing books. Bill had several books published in a foreign country while he was a citizen and resident of that country. During 2001, Bill entered the United States as a resident alien. After becoming a U.S. resident, he continued to receive royalties from his foreign publisher. Bill reports his income and expenses on the cash basis (he reports income on his tax return when received and deducts expenses when paid). Bill's 2001 self-employment income includes the royalties received after he became a U.S. resident even though the books were published while he was a nonresident alien.

Reporting self-employment tax.   Use Schedule SE (Form 1040) to report and figure your self-employment tax. Then enter the tax on line 53 of Form 1040 and attach Schedule SE to Form 1040.

Deduction for one-half of self-employment tax.   If you must pay self-employment tax, you can deduct one-half of the self-employment tax paid in figuring your adjusted gross income.

More information.   Get Publication 533 for more information about self-employment tax.

International Social Security Agreements

The United States has entered into social security agreements with foreign countries to coordinate social security coverage and taxation of workers employed for part or all of their working careers in one of the countries. These agreements are commonly referred to as totalization agreements. Under these agreements, dual coverage and dual contributions (taxes) for the same work are eliminated. The agreements generally make sure that social security taxes (including self-employment tax) are paid only to one country. Agreements are in effect with the following countries.

• Austria.
• Belgium.
• Canada.
• Chile (effective 12/01/2001).
• Finland.
• France.
• Germany.
• Greece.
• Ireland.
• Italy.
• Korea (South) (effective 4/1/2001).
• Luxembourg.
• The Netherlands.
• Norway.
• Portugal.
• Spain.
• Sweden.
• Switzerland.
• The United Kingdom.

Other agreements are also expected to enter into force in the future.

Employees.   Generally, under these agreements, you are subject to social security taxes only in the country where you are working. However, if you are temporarily sent to work for the same employer in the United states and your pay would normally be subject to social security taxes in both countries, most agreements provide that you remain covered only by the social security system of the country from which you were sent. You can get more information on any agreement by contacting the U.S. Social Security Administration at the address given later. If you have access to the Internet, you can get more information at www.ssa.gov/international.

To establish that your pay is subject only to foreign social security taxes and is exempt from U.S. social security taxes (including the Medicare tax) under an agreement, you or your employer should request a certificate of coverage from the appropriate agency of the foreign country. This will usually be the same agency to which you or your employer pays your foreign social security taxes. The foreign agency will be able to tell you what information is needed for them to issue the certificate. Your employer should keep a copy of the certificate because it may be needed to show why you are exempt from U.S. social security taxes. Only wages paid on or after the effective date of the agreement can be exempt from U.S. social security taxes.

Some of the countries with which the United States has agreements will not issue certificates of coverage. In this case, either you or your employer should request a statement that your wages are not covered by the U.S. social security system. Request the statement from the following address.

U.S. Social Security Administration
Office of International Programs
P.O. Box 17741
Baltimore, MD 21235-7741

Self-employed individuals.   Under most agreements, self-employed individuals are covered by the social security system of the country where they reside. However, under some agreements, you may be exempt from U.S. self-employment tax if you temporarily transfer your business activity to or from the United States.

If you believe that your self-employment income is subject only to U.S. self-employment tax and is exempt from foreign social security taxes, request a certificate of coverage from the U.S. Social Security Administration at the address given earlier. This certificate will establish your exemption from foreign social security taxes.

To establish that your self-employment income is subject only to foreign social security taxes and is exempt from U.S. self-employment tax, request a certificate of coverage from the appropriate agency of the foreign country. If the foreign country will not issue the certificate, you should request a statement that your income is not covered by the U.S. social security system. Request it from the U.S. Social Security Administration at the address given earlier. Attach a photocopy of either statement to Form 1040 each year you are exempt. Also print Exempt, see attached statement on the line for self-employment tax.

Estimated Tax Form 1040-ES (NR)

You may have income from which no U.S. income tax is withheld. Or the amount of tax withheld may not equal the income tax you estimate you will owe at the end of the year. If so, you may have to pay estimated tax.

Generally, you must make estimated tax payments for 2002 if you expect to owe at least $1,000 in tax and you expect your withholding and credits to be less than the smaller of:

1. 90% of the tax to be shown on your 2002 income tax return, or
2. 100% of the tax shown on your 2001 income tax return (if your 2001 return covered all 12 months of the year).

If your adjusted gross income for 2001 was more than $150,000 ($75,000 if your filing status for 2002 is married filing separately), substitute 112% for 100% in (2) above if you are not a farmer or a fisherman.

A nonresident alien should use Form 1040-ES (NR) to figure and pay estimated tax. Checks should be made payable to the "United States Treasury."

How to estimate your tax for 2002.   If you filed a 2001 return on Form 1040NR or Form 1040NR-EZ and expect your income, number of exemptions, and total deductions for 2002 to be nearly the same, you should use your 2001 return as a guide to complete the Estimated Tax Worksheet in the Form 1040-ES (NR) instructions. If you did not file a return for 2001, or if your income, exemptions, deductions, or credits will be different for 2002, you must estimate these amounts. Figure your estimated tax liability using the Tax Rate Schedule in the 2002 Form 1040-ES (NR) instructions for your filing status.

Note.   If you expect to be a resident of Puerto Rico during the entire year, use Form 1040-ES.

When to pay estimated tax.   Make your first estimated tax payment by the due date for filing the previous year's Form 1040NR or Form 1040NR-EZ. If you have wages subject to the same withholding rules that apply to U.S. citizens, you must file Form 1040NR or Form 1040NR-EZ and make your first estimated tax payment by April 15, 2002. If you do not have wages subject to withholding, file your income tax return and make your first estimated tax payment by June 17, 2002.

If your first estimated tax payment is due April 15, 2002, you can pay your estimated tax in full at that time or in four equal installments by the dates shown below.

1st installment	April 15, 2002
2nd installment	June 17, 2002
3rd installment	Sept. 16, 2002
4th installment	Jan. 15, 2003

1. ½ of your estimated tax by June 17, 2002,
2. ¼ of the tax by September 16, 2002, and
3. ¼ by January 15, 2003.

You do not have to make the payment due January 15, 2003, if you file your 2002 Form 1040NR or 1040NR-EZ by January 31, 2003, and pay the entire balance due with your return.

Fiscal year.   If your return is not on a calendar year basis, your due dates are the 15th day of the 4th, 6th, and 9th months of your fiscal year, and the 1st month of the following fiscal year. If any date falls on a Saturday, Sunday, or legal holiday, use the next day that is not a Saturday, Sunday, or legal holiday.

Changes in income, deductions, or exemptions.   Even if you are not required to make an estimated tax payment in April or June, your circumstances may change so that you will have to make estimated tax payments later. This can happen if you receive additional income or if any of your deductions are reduced or eliminated. If so, see the instructions for Form 1040-ES (NR) and Publication 505 for information on figuring your estimated tax.

Amended estimated tax.   If, after you have made estimated tax payments, you find your estimated tax is substantially increased or decreased because of a change in your income or exemptions, you should adjust your remaining estimated tax payments. To do this, see the instructions for Form 1040-ES (NR) and Publication 505.

Penalty for failure to pay estimated income tax.   You will be subject to a penalty for underpayment of installments of estimated tax except in certain situations. These situations are explained on Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

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