Self-employed in the UK as a US citizen: who gets your social security?

Does US self-employment tax apply if you live in the UK?

Yes, as a starting point. The IRS says the rules for paying self-employment tax are generally the same whether a self-employed US citizen or resident lives in the United States or abroad. The tax is a social security and Medicare charge on net earnings from self-employment, and it applies once those earnings pass a low fixed floor.

The two reliefs that deal with income tax do not touch it. Publication 54 (opens the official IRS page in a new tab) says all self-employment income counts towards net earnings, including income excluded from income tax under the foreign earned income exclusion. The foreign tax credit is no answer either. Its instructions allow the credit against US income tax, and Publication 514 says no credit or deduction is allowed for social security taxes paid to a country that has a social security agreement with the United States. UK National Insurance therefore cannot be claimed on Form 1116.

Publication 54 also says a return is required once net self-employment earnings reach that floor, even where gross income is below the normal filing threshold. A freelancer with a modest UK profit can therefore have a US filing obligation, and without the agreement would owe a US social security charge with nothing to set against it.

• The charge is worked out on Schedule SE (opens the official IRS page in a new tab), not on the income tax lines of the return
• The foreign earned income exclusion does not reduce the earnings it is charged on
• The foreign tax credit offsets income tax, not self-employment tax
• National Insurance is not a creditable foreign tax for a UK resident

Which country covers you under the US-UK totalization agreement?

The country you live in. The Social Security Administration's summary of the agreement states the rule in two lines: self-employed workers who reside in the United States are assigned US coverage, and self-employed workers who reside in the United Kingdom are assigned UK coverage. Coverage in one country means exemption from contributions in the other.

The purpose of totalization agreements (opens the official IRS page in a new tab), in the IRS's description, is to remove dual coverage and dual contributions for the same work, so that social security taxes, self-employment tax included, are paid to only one country. For a sole trader the test is residence, not citizenship, where the clients are, or the currency of the invoices. An American freelancer living in Leeds whose customers are all in the United States is still assigned to the UK system.

The rule runs both ways. A self-employed person who moves back to the United States becomes covered there, and US self-employment tax applies again. The published summary gives only the residence rule. It does not set out how a year of arrival or departure is divided, or how someone with a business in each country is treated, so those cases need the agreement itself read against the facts before a return is filed.

How do you prove the exemption on your US return?

With a certificate of coverage issued by HMRC, attached to the return. The Social Security Administration says self-employed workers must request a certificate to establish the exemption from US contributions, and should attach a copy to their US tax return every year as proof. The exemption is claimed on the return each year. It is not automatic.

The Schedule SE instructions set out the mechanics. Where self-employment income is exempt under an agreement, you obtain a statement from the foreign agency confirming that the income is covered by its system. You do not complete Schedule SE. You attach a copy of the statement to Form 1040, tick the relevant box on the self-employment tax line of Schedule 2, and enter the words the instructions give: Exempt, see attached statement.

If the foreign agency will not issue a statement, the instructions point to the Social Security Administration's Office of Earnings and International Operations, which can confirm that the income is not covered by the US system. Employers are told to keep certificates on file for an audit. The self-employed are told to attach theirs, which is the stricter standard.

How do you get a certificate of coverage from HMRC?

You ask HMRC, online or by post. The Social Security Administration's page on the UK agreement directs applicants to an HMRC online tool that checks how to apply, and gives a postal address for requests at HMRC's PT Operations North East England office. It also lists what the request should contain.

HMRC's own guidance on certificates of coverage says a self-employed person can apply, names the USA among the agreement countries, and asks for your National Insurance number, nationality, where you are ordinarily resident and details of the self-employment. That guidance is written mainly for people leaving the UK to work in an agreement country, so say plainly that you are a UK resident who needs the certificate for a US tax return. An agent can apply for you once authorised. HMRC publishes expected reply times, and they should be checked early in the filing season.

• Full name, including any previous names, and date and place of birth
• Country of citizenship and country of permanent residence
• US Social Security number and UK National Insurance number
• The nature of the self-employment and the address of the business
• The date the work in the UK began and the date it is expected to end

What does the US return still report?

The business itself. The agreement removes a social security charge and nothing else, so worldwide income is still reported. Profit is worked out on Schedule C (opens the official IRS page in a new tab) under US rules and taxed as ordinary income, and UK income tax on the same profit is then relieved by the foreign tax credit or the exclusion.

Take a US citizen working as a freelance designer in Bristol, resident in the UK and registered with HMRC as a sole trader. Her US return carries Schedule C with the year's income and expenses converted to dollars. Schedule SE is left out, the HMRC certificate is attached, and the Schedule 2 line carries the exemption wording. UK income tax on her profit goes on Form 1116. Her Class 4 National Insurance does not, because it is a social security contribution under an agreement.

The choice between the foreign tax credit (opens the official IRS page in a new tab) and the exclusion on Form 2555 is separate from the social security question. UK rates are generally higher than US rates, so the credit often gives the better result and keeps carryovers, as our post on the foreign tax credit or the exclusion in the UK explains. A sole trader pays UK tax later than an employee does, so the timing of the credit needs care. We prepare both sides through our individual tax return preparation service.

What do you owe in the UK as a sole trader?

Income tax and National Insurance on your profits, both through Self Assessment. GOV.UK says you must tell HMRC when you become self-employed as a sole trader, and anyone who has not filed before must register by 5 October after the end of the tax year. The UK tax year runs from 6 April to 5 April.

National Insurance for the self-employed comes in two classes, and the self-employed National Insurance rates (opens the official GOV.UK page in a new tab) page sets out both. Class 4 is charged as a percentage of profits above an annual threshold. Class 2 is treated as paid once profits reach a lower figure, which protects your contribution record, and below that figure it can be paid voluntarily. Most people pay both through their Self Assessment tax return (opens the official GOV.UK page in a new tab), due online by 31 January.

These contributions are what the certificate of coverage certifies, so the UK registration has to be in place before the US exemption can be evidenced. Records kept for one country should serve the other, bearing in mind that the UK return follows the tax year and the US return follows the calendar year. Our UK Self Assessment service files the SA100 and its self-employment pages, and our bookkeeping and accounting service keeps one set of books that feeds both returns.

What if earlier US returns paid the tax or ignored it?

Both can usually be put right, by different routes. Self-employment tax paid for a year in which you were covered by the UK system can be reclaimed on an amended return. A return that simply left the tax off needs the missing evidence: a certificate covering that period.

A refund is claimed on Form 1040-X (opens the official IRS page in a new tab), with the certificate attached. The IRS says a refund claim must generally be filed within three years from filing or two years from payment, whichever is later, so older years can fall out of reach. Check the period the certificate states, because it has to cover the year being amended. Our form guide to Form 1040-X explains how an amended return is put together.

Where earlier returns reported Schedule C profit with no Schedule SE and no statement, the position on those years is unsupported, even if no tax was in fact due. Obtain the certificate, attach it from the next return onwards, and take advice on whether the earlier years should be amended. That depends on the facts, including whether you were resident in the UK throughout. For the wider picture of the two returns, go back to the guide to US and UK tax returns for Americans in the UK.