Self-employed in the UK as a US citizen: the US tax rules

Freelancers, contractors, sole traders and company owners who are US citizens or green card holders face two layers of US tax on their profits: income tax, and self-employment tax in place of Social Security and Medicare. The second layer is the one that surprises people, and it is also the one the US–UK social security agreement usually removes.

Self-employment tax: the 15.3%

US self-employment tax is 12.4% Social Security plus 2.9% Medicare on 92.35% of net profit, with the Social Security part capped at the wage base (US$176,100 for 2025) and an extra 0.9% Medicare above US$200,000 (US$250,000 joint). Half of it is deductible against income. Neither the Foreign Earned Income Exclusion nor the Foreign Tax Credit reduces it: the exclusion applies only to income tax, and the credit only covers income taxes, which UK National Insurance is not.

The Totalization Agreement removes it for UK residents

Under the US–UK social security agreement, a self-employed person who lives in the UK is covered by UK National Insurance only. To rely on that:

1. Pay UK Class 2/Class 4 National Insurance through Self Assessment as normal.
2. Obtain a certificate of coverage from HMRC confirming UK coverage.
3. Attach it to the US return and do not complete Schedule SE, with a statement citing the agreement.

Where your clients are does not matter; where you are resident and working does. Years of UK contributions can also count towards US Social Security eligibility under the agreement's totalising rules.

Income tax on the profit

The profit is reported on Schedule C of Form 1040. For most UK residents the Foreign Tax Credit then eliminates US income tax on it, because UK income tax is higher. The exclusion is an alternative but it does not help with self-employment tax, reduces IRA contribution capacity and has the stacking effect described in the FEIE guide.

UK structures and their US consequences

Sole trader. Simple on both sides: Self Assessment in the UK, Schedule C in the US.

UK limited company. Common for higher earners in the UK, but for a US owner it is a controlled foreign corporation if US persons own more than 50%. That brings annual Form 5471 reporting, GILTI and Subpart F inclusions taxable whether or not profits are distributed, and penalties of US$10,000 per missed Form 5471. The high-tax exclusion and a section 962 election can reduce the cost, but the structure should be chosen with the US position modelled first.

UK LLP. Usually treated as a partnership for US purposes, avoiding the corporate anti-deferral rules, with each US partner reporting their share. Often preferred by US professionals in the UK.

Accounts and VAT

Business bank accounts count towards the FBAR threshold like any other account. UK VAT registration is required when taxable turnover passes the threshold (£90,000); VAT is not creditable against US tax.

Deadlines

• US Form 1040 with Schedule C: 15 April, automatic extension to 15 June for people abroad, 15 October with Form 4868.
• FBAR: 15 April, automatic extension to 15 October.
• UK Self Assessment: 31 January after the 5 April year end; payments on account 31 January and 31 July.
• UK VAT returns: usually quarterly, one month and seven days after the period end.

Frequently asked questions

I pay Class 4 NIC. Do I still owe US self-employment tax?

Not if you obtain a certificate of coverage from HMRC and attach it to your return. Without the certificate the IRS can assess the tax.

Should I set up a UK limited company?

Only after the US consequences are modelled. For many US owners the extra US compliance cost outweighs the UK saving; an LLP or remaining a sole trader is often better.