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Tax Help for Americans Working Abroad as Contractors
Updated: Oct 5
Short answer: All State Tax Resolution, led by Sabih Shafi, an Enrolled Agent, prepares U.S. returns for contractors, freelancers, teachers, energy workers, touring performers and other Americans working abroad, in any country. If you are a U.S. citizen or green card holder, you owe U.S. tax on worldwide income and generally must file from overseas. The foreign earned income exclusion can cut your income tax, but it does not remove self-employment tax or reporting duties.
Key takeaways
You owe U.S. tax on worldwide income and generally must file from abroad.
The foreign earned income exclusion is up to $130,000 for 2025 and $132,900 for 2026, claimed on Form 2555.
It does not reduce self-employment tax. A totalization agreement can.
Pay you earn as a U.S. government employee does not qualify.
If you are behind, late returns are often the fix. Streamlined exists for non-willful cases.
Do I pay U.S. taxes if I work overseas?
Yes. The IRS says U.S. citizens and residents abroad are taxed on worldwide income and generally file like everyone else. Income you can exclude still counts when testing whether you must file. Net self-employment earnings of $400 or more also require a return.
The due date is April 15. If you live and work outside the U.S. on that date, you get an automatic two extra months, to June 15, by attaching a statement. Interest still runs from April 15. Form 4868, filed by June 15, adds four months, to October 15, for filing only. For tax year 2025, those dates are June 15 and October 15, 2026.
How the foreign earned income exclusion works
The exclusion leaves part of your foreign earnings out of U.S. income tax: up to $130,000 for 2025 and $132,900 for 2026. You need all three.
A foreign tax home. If your abode, where your family, economic and personal ties are, stays in the U.S., you do not have one. The IRS example: an offshore rig worker on a 28-days-on, 28-days-off schedule who returns to a U.S. family home does not qualify. A job at one place lasting a year or less is generally temporary, which defeats a foreign tax home.
Foreign earned income. Pay for work you do abroad. Where you are paid does not matter, so a U.S. client paying a U.S. bank account still counts. Work done in the U.S. does not, so a touring performer's U.S. dates cannot be excluded.
One of two tests. Bona fide residence means living abroad for an uninterrupted period that includes a full tax year. A stay for a definite, temporary purpose usually does not count. Green card holders can use this test only if they are citizens of a treaty country. Physical presence means 330 full days in foreign countries in any 12 months in a row. U.S. days and time on or over international waters do not count, including offshore installations outside a country's territorial waters.
Digital nomads usually use the 330-day test, but the tax home rule is harder. With no main place of business, the IRS looks at where you regularly live, and with neither, wherever you work.
You must choose the exclusion on Form 2555, attached to a filed return. A first claim generally needs a timely return, an amended timely return, or a late return filed within a year of the original due date. Later, you can still claim it if you owe no tax after the exclusion, or file before the IRS discovers you missed it.
Self-employment tax: what the exclusion does not fix
The exclusion lowers income tax only. It does not reduce self-employment tax, so a contractor still owes Social Security and Medicare tax on net earnings.
A totalization agreement can change that. The U.S. has them with some countries to stop double Social Security tax on the same work. Under some, a self-employed person is covered only by the country where they live. If the foreign system covers you, attach a copy of that country's certificate to your U.S. return each year. If the U.S. system covers you, request a certificate of coverage from the Social Security Administration.
Working for the U.S. government or a defense contractor
Publication 54 says amounts the United States or its agencies pay their employees are not foreign earned income. That bars the exclusion for U.S. government employees.
Publication 54 does not use the word contractor. The IRS combat zones page says contractors, or employees of contractors, supporting the U.S. Armed Forces in designated combat zones may qualify for the exclusion. In a combat zone supporting the Armed Forces, a U.S. abode does not defeat the tax home test.
Publication 54 also says a foreign company can count as an "American employer," so U.S. Social Security and Medicare tax can apply to your pay, when its employee works on a U.S. government contract held by a member of a U.S.-controlled group that includes it.
Exclusion or foreign tax credit?
The foreign tax credit (Form 1116) reduces your U.S. tax by income tax you paid a foreign country, within limits. The exclusion removes income instead. You cannot use both on the same income, and claiming a credit or deduction for tax on excluded income may revoke your exclusion. Above the cap, you can exclude up to the cap and credit the foreign tax on the rest.
The exclusion has side effects:
No additional child tax credit or earned income credit that year.
Excluded pay does not count as compensation for IRA contributions.
No deducting expenses tied to excluded income, so a contractor who excludes most income loses most business deductions.
It carries into later years until revoked. Re-electing within five years of a revocation needs IRS approval.
Foreign accounts: FBAR and Form 8938
Foreign accounts can trigger two separate reports.
FBAR (FinCEN Form 114). Required if your foreign financial accounts together went over $10,000 at any time in the year, even if they earn no interest. You file online with FinCEN, not with your return. It is due April 15, with an automatic extension to October 15, so 2025 accounts are due by October 15, 2026.
Form 8938. This goes with your return. If you live abroad (a foreign tax home plus a residence or 330-day test), it applies above $200,000 at year-end or $300,000 at any time for single or separate filers, and $400,000 and $600,000 for joint filers. It does not replace the FBAR.
Missing either can bring penalties, separate from penalties on unpaid tax.
State taxes after you move abroad
Leaving the country does not always end state tax. Some states keep treating you as a resident if you keep a home or close ties there and your time away looks temporary. States differ, so we check your last state's rules instead of guessing.
Behind on filing? Late returns versus Streamlined
We often see contractors abroad who skipped filing for years, assuming they owed nothing. The IRS has no time limit to assess tax for a year with no valid return, and filing starts the normal clock.
Late returns. The late-filing penalty is figured on tax owed after credits and payments. If the exclusion and credits bring that to zero, there is generally nothing for it to apply to. Other forms, such as reports on a foreign company or trust you own, have their own penalties. If the IRS has not contacted you, it says to file late FBARs as soon as possible.
Streamlined Foreign Offshore Procedures. These fit taxpayers abroad whose failure to report foreign accounts or income was non-willful: negligence, inadvertence, mistake or a good-faith misunderstanding of the law. The IRS requires:
Returns for the most recent three years with a passed due date, plus information returns such as Form 8938.
FBARs for the most recent six years with a passed due date.
Form 14653 certifying non-willful conduct.
All tax and interest, paid with the returns.
No U.S. abode and 330 full days outside the U.S. in at least one of those three years.
The IRS says filers who qualify and follow the instructions are not subject to failure-to-file, failure-to-pay, accuracy, information return or FBAR penalties, unless an exam finds fraud or a willful FBAR violation. Returns can still be audited, and you are not eligible once an exam has started. If your conduct may have been willful, talk to us before filing anything.
Foreign clients and platforms: no 1099, still report
Foreign clients and platforms rarely send a U.S. Form 1099. The IRS says you must report foreign source income with or without a W-2 or 1099. Sole proprietors use Schedules C and SE, in U.S. dollars. Keep invoices, contracts, payout reports and bank statements for the return, FBAR maximum values, and any IRS question.
How we help
I am Sabih Shafi, an IRS Enrolled Agent, federally licensed to represent taxpayers before the IRS in all 50 states. We prepare U.S. returns for clients in any country, by phone and video, in English or Spanish.
Exclusion review: we test your tax home and day count, check for a totalization agreement, and run the exclusion and foreign tax credit both ways.
Late returns: we prepare several unfiled years and tell you whether Streamlined or plain late returns fit.
Foreign account reports: we check whether you owe an FBAR or Form 8938.
Notices and balances: IRS and state responses and payment plans.
A flat fee quoted in writing before work starts.
Frequently Asked Questions
Do I pay U.S. taxes if I work overseas for a foreign company?
Yes. U.S. citizens and green card holders are taxed on worldwide income, wherever the employer is. You may exclude part, but you still file.
Can a 1099 contractor use the foreign earned income exclusion?
Yes, with a foreign tax home and a residence or 330-day test. It lowers income tax, not self-employment tax.
I am a digital nomad. What do I owe?
U.S. tax, like anyone else. The 330-day test counts only full days in foreign countries, so U.S. visits and long flights over international waters count against you.
Do I need an FBAR if my foreign balance is small?
Not if all your foreign accounts together stay at $10,000 or less all year.
I work overseas for a defense contractor. Is my pay excluded?
It depends on who employs you. Pay from the U.S. government to its own employees does not qualify. Contractors' employees supporting the Armed Forces in combat zones may. Send us your contract.
General information, not tax advice for your situation.
Related Reading
Talk to an Enrolled Agent
This article is general information, not individual tax advice. If you want to talk through your own IRS or state balance, book a free 20-minute review or call or text us directly.
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