Running a Business Abroad as a Sole Proprietor — U.S. Rules
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A sole proprietorship run from abroad is reported on Schedule C in U.S. dollars with the same rules as a business at home — plus three differences: the foreign earned income exclusion can shelter the profit from income tax, the qualified business income deduction usually cannot be claimed, and self-employment tax survives both. The structure is simple; the compliance is not.
On this page
- How is foreign business income reported?
- Does the foreign earned income exclusion apply to business profit?
- Can I take the qualified business income deduction?
- What about self-employment tax?
- Do I need to register the business locally?
- Which retirement plans can I use?
- What records will two countries want?
- Frequently asked questions
- Next step
How is foreign business income reported?
On Schedule C, converted to dollars. Gross receipts from foreign clients, platform payouts, and cash all go in; ordinary business expenses come out. Foreign value-added or sales taxes you collect are not income and the amounts you remit are not deductions — keep them out of both. Foreign income tax paid on the profit is handled through the foreign tax credit, not as a Schedule C expense. Net profit flows to Schedule SE and, if you qualify, to Form 2555.
Does the foreign earned income exclusion apply to business profit?
Yes. Net profit from personal services performed abroad is foreign earned income. If you meet the bona fide residence or physical-presence test, Form 2555 excludes the profit up to the annual limit, and the housing deduction (the self-employed version of the housing exclusion) can apply on top. One nuance: when a business depends on both your services and capital — inventory, equipment, employees — only the portion attributable to your services, capped at 30% of net profit in capital-intensive cases, counts as earned income.
Can I take the qualified business income deduction?
Usually not. The deduction applies only to income from a trade or business conducted within the United States — effectively connected income. A consultancy run from Lisbon serving Portuguese and American clients is a foreign business for this purpose, and its profit doesn't qualify, even though it's reported on Schedule C. Expats who move abroad often lose this deduction without noticing.
What about self-employment tax?
It applies to the full net profit before the exclusion, at the standard rate, unless a totalization agreement assigns your coverage to the country where you live. In agreement countries, you register with the local social security system, obtain a certificate or statement of coverage, and attach it to your return instead of Schedule SE. In non-agreement countries, you owe U.S. self-employment tax in full plus whatever the local system requires; neither the exclusion nor the foreign tax credit reduces it.
Do I need to register the business locally?
Almost always. Most countries require a self-employed resident to register for local income tax, often for value-added tax above a turnover threshold, and sometimes with a business registry. Working on a tourist or spousal visa may not permit local self-employment at all. Local registration also determines which social system you're in — which feeds straight back into the self-employment tax question above.
Which retirement plans can I use?
A SEP IRA or solo 401(k) is available to a self-employed expat, but contributions are based on net earnings not excluded under the foreign earned income exclusion. Exclude the whole profit and the contribution limit is zero. Expats using the foreign tax credit instead keep full access, which is one more factor in the exclusion-versus-credit decision.
What records will two countries want?
Invoices and receipts in the original currency with conversion rates noted; a bank account for the business (foreign, so FBAR-reportable); local tax filings and payments as evidence for the foreign tax credit; and your day log if you're relying on the physical-presence test. Keep local-currency books for the local return and a dollar reconciliation for the U.S. one — the two will never match exactly, and that is normal.
Frequently asked questions
Should I form a local company instead?
It removes U.S. self-employment tax but adds Form 5471, possible current taxation of the company's income, and local corporate compliance. For a one-person service business it's usually more friction than saving.
My clients are all in the U.S. Is my income still foreign earned income?
Yes. Source follows where you perform the work, not where the client is.
Can I deduct my home office abroad?
Yes, under the normal rules, with costs converted to dollars. Rent used for the home office can't also be counted toward the housing deduction.
Do I pay estimated taxes from abroad?
If you expect to owe — common because of self-employment tax — yes, quarterly, with no expat extension.
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If you run a business from abroad and want the exclusion, self-employment tax, and local coordination handled together, our U.S. Tax Desk can set it up with you. See pricing or book a free fit call.
Cross-border taxes, handled in one place
U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
Book a free fit call