Self-Employment Tax for US Citizens in Canada: Why the Totalization Agreement Means CPP, Not Both

Short version: Form T2125 Explained: Canadian Business Income

US self-employment tax (15.3% on net earnings up to the Social Security wage base, 2.9% above it) applies to US citizens wherever they live, and the foreign earned income exclusion does not reduce it. Without a treaty, a US citizen running a business in Canada would pay CPP contributions to Canada and self-employment tax to the US on the same income. The Canada-US totalization agreement prevents that: a self-employed person resident in Canada is covered by CPP only and is exempt from US self-employment tax. The exemption is claimed by a statement on the US return, and the credits earned under each system can be combined for benefit eligibility.

Key takeaways

• US self-employment tax: 12.4% Social Security on net self-employment earnings up to the wage base (about $176,100 for 2025) plus 2.9% Medicare on all net earnings (plus 0.9% additional Medicare above $200,000), computed on Schedule SE; half is deductible. Applies to US citizens and residents worldwide; not reduced by the FEIE or the foreign tax credit.
• CPP for the self-employed: both the employee and employer shares (11.9% on pensionable earnings between the basic exemption and the YMPE, about $71,300 for 2025, plus CPP2 at 8% on earnings between the YMPE and the YAMPE, about $81,200), computed on Schedule 8 of the T1; the employer share is deductible and the employee share is a credit.
• The totalization agreement: a self-employed person who resides in Canada is subject only to Canadian social security legislation (CPP); one who resides in the US is subject only to US law. Residence, not the location of the business or clients, decides.
• Claiming the exemption: the US citizen in Canada attaches a statement to the 1040 (or a certificate of coverage from Service Canada) stating that they are covered under the CPP by virtue of the agreement, and does not compute self-employment tax on Schedule SE.
• Benefit coordination: periods of coverage under CPP and US Social Security can be combined to meet each system's minimum requirements; each pays a benefit based on its own credits.

Without the agreement

A US citizen in Toronto with $100,000 of net self-employment income would owe about $14,100 of US self-employment tax (15.3% of 92.35% of net earnings) and about $8,000 of CPP contributions on the same income. The foreign earned income exclusion excludes the income from income tax but not from self-employment tax; the foreign tax credit offsets US income tax, not self-employment tax. The double contribution would be a real cost.

The agreement

The Canada-US Agreement on Social Security (in force since 1984) provides that a self-employed person who resides in one country and works in one or both countries is subject only to the social security legislation of the country of residence. A self-employed US citizen residing in Canada is covered by CPP and exempt from US self-employment tax; a self-employed Canadian citizen residing in the US is covered by US Social Security and exempt from CPP (a Canadian resident of the US does not contribute to CPP on self-employment income). Quebec residents are covered by QPP under a parallel agreement.

Employees are assigned differently (generally to the country where the work is performed, with a five-year exception for temporary transfers), but for the self-employed, residence is the rule.

Claiming the exemption

The IRS accepts either a certificate of coverage issued by Service Canada (which certifies that the person is covered under CPP) or, for self-employed individuals resident in Canada, a statement attached to the return citing the agreement. The statement should say that the taxpayer is a resident of Canada, is self-employed, and is subject to the Canada Pension Plan under the Canada-US totalization agreement, and should be attached to the 1040 in place of Schedule SE (or with Schedule SE showing no tax and a reference to the exemption). Tax software handles this with an exemption code on Schedule SE.

Without the statement, the IRS may assess self-employment tax; the correction is an amended return with the statement.

The Canadian side

The self-employed US citizen files Schedule 8 with the T1 and pays both halves of CPP (and CPP2 above the YMPE). The employer half is deductible from income; the employee half is a non-refundable credit. Quebec residents pay QPP through the TP-1. The contributions build CPP entitlement.

Benefit coordination

A US citizen who worked in the US before moving to Canada, and then was self-employed in Canada under CPP, may not have 40 quarters of US coverage (the minimum for US Social Security retirement benefits) or the minimum for CPP. The agreement allows each country to count periods of coverage in the other to meet its minimum eligibility requirements; each then pays a benefit based only on its own credits. A person with 30 US quarters and 10 years of CPP contributions can use the CPP years to reach the 40-quarter US minimum, receiving a US benefit based on the 30 quarters and a CPP benefit based on the 10 years.

The Windfall Elimination Provision, which formerly reduced US Social Security benefits for people receiving a foreign pension based on non-covered work, was repealed for benefits payable from 2024 onward, so CPP no longer reduces a US Social Security benefit.

Worked example

A US citizen software consultant living in Vancouver has $150,000 CAD of net self-employment income.

• Canada. T1 with T2125 and Schedule 8: CPP contributions of about $8,100 plus CPP2 of about $800; employer half deductible; employee half a credit; income tax on the balance at BC rates.
• US. 1040 with Schedule C reporting the income (converted); foreign tax credit for BC and federal income tax; Schedule SE with the totalization exemption statement; no self-employment tax. Saving versus no exemption: about $21,000 USD-equivalent of self-employment tax avoided.
• Later. Her US Social Security record (from earlier US work) and her CPP record are combined for eligibility; each system pays on its own credits; no WEP reduction.

Official sources

"The United States has entered into agreements, called 'totalization agreements,' with several nations for the purpose of avoiding double taxation of income with respect to social security taxes." — Internal Revenue Service, Totalization Agreements, https://www.irs.gov/individuals/international-taxpayers/totalization-agreements

"The Agreements help fill gaps in benefit coverage for workers who divide their careers between the United States and an Agreement country." — Social Security Administration, Totalization Agreement with Canada, https://www.ssa.gov/international/Agreement_Pamphlets/canada.html

Practitioner note

The self-employment tax exemption is the single most valuable line on a self-employed American's Canadian-year return, and the most often missed by US preparers who have never seen the agreement. Fifteen percent of net earnings, every year, is the cost of leaving the statement off Schedule SE. We attach it to every return, and we amend the ones that came to us without it.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the totalization exemption statement on the US return, the CPP computation on the Canadian return, and the amended US returns where self-employment tax was paid in error. See cross-border pricing or book a call.