Are you a resident of a U.S. territory or a non-resident alien wondering about self-employment tax implications? This FAQ guide will help clarify the complex tax concepts related to self-employment tax in U.S. territories. Citing IRM 21.8.1.5.4 (10-01-2022) as the source, we will present this information in a relatable and easy-to-understand manner.

Q1: Who is subject to self-employment (SE) tax in U.S. territories?

Non-resident aliens are generally not subject to SE tax, unless they fall under U.S. social security coverage due to an international social security agreement, or if they are bona fide residents of a U.S. territory. If a nonresident alien return is received claiming to owe SE tax, the IRS will make the assessment using standard procedures.

Bona fide residents, including nonresident aliens, of the following territories are subject to SE tax:

• Puerto Rico
• Guam
• American Samoa
• U.S. Virgin Islands
• The Commonwealth of the Northern Mariana Islands

Q2: How do Puerto Rican residents report and pay SE tax?

Puerto Rican residents who are liable for SE tax must report and pay tax to the United States IRS on Form 1040-PR or 1040-SS. They must complete Part V or VI on Page 4 of the Form 1040-PR/1040-SS for SE Tax.

Q3: How do residents of other U.S. territories report and pay SE tax?

SE tax is reported and paid to the United States IRS on Form 1040-SS for residents of Guam, American Samoa, U.S. Virgin Islands, and The Commonwealth of the Northern Mariana Islands.

Q4: What is the deduction and tax rate for SE tax in 2023?

For 2023, the self-employment tax deduction is 7.65 percent (1/2 the SE tax rate), which includes:

• 6.2 percent for social security
• 1.45 percent for hospital insurance (Medicare)

To calculate total earnings after the SE tax deduction, use the formula:

Total Earnings After SE Tax Deduction = Total Earnings x 0.9235

Example:Maria, a self-employed graphic designer, is a bona fide resident of Puerto Rico. In 2023, she earned $100,000 in total income. To calculate her total earnings after the SE tax deduction, she would use the formula:

Total Earnings After SE Tax Deduction = $100,000 x 0.9235 = $92,350

Maria’s self-employment tax would then be calculated as follows:

SE Tax = $92,350 x 15.3% = $14,129.55

Remember, Maria can deduct half of her self-employment tax, which comes to $7,064.77.

Q5: What is the self-employment tax rate for 2022?

The self-employment tax rate for 2022 is 15.3 percent, which consists of:

• 12.4 percent for social security tax
• 2.9 percent for hospital insurance (Medicare)

Q6: What are the maximum net earnings subject to social security and Medicare for 2023?

For 2023, the maximum net earnings subject to social security is $160,200. However, the maximum net earnings subject to the Medicare portion remains unlimited.

Example: Let’s consider Jane Doe, a non-resident alien who became a bona fide resident of Guam in 2023 and started a freelance design business. Jane earned $85,000 in 2023. As a bona fide resident of a U.S. territory, Jane is subject to SE tax. She will report and pay this tax to the United States IRS using Form 1040-SS.

This FAQ guide aims to provide a clear understanding of self-employment tax laws in U.S. territories. However, tax laws and regulations can be complex, and individual circumstances may require further consideration. If unsure, consider consulting a local tax professional for advice tailored to your situation.

Source: Internal Revenue Manual (IRM) 21.8.1.5.4 (10-01-2022)