Working abroad can make a US tax return feel straightforward at first: one employer, one salary, perhaps some foreign tax already withheld. Then a Saturday consulting job turns into regular freelance work, or a hobby starts bringing in real money. Suddenly, the tax picture is not quite so tidy.
That is where remote work abroad for US citizens can get complicated. The US generally taxes citizens and resident aliens on worldwide income, and salary, freelance earnings, and business income do not always follow the same rules.
Is My Overseas Salary Still Taxable in the US?
Usually, yes. A salary earned while living abroad generally still goes on a US return. Qualifying taxpayers may be able to use the Foreign Earned Income Exclusion (FEIE), which is capped at US$130,000 per qualifying person for the 2025 tax year. Others may be able to use the Foreign Tax Credit for qualifying foreign income taxes paid.
Those two mechanisms are not interchangeable, though. Foreign taxes attributable to income excluded under the FEIE generally cannot also be claimed as a credit. The better approach depends on the numbers, the country, and the taxpayer’s wider circumstances.
What Changes When I Start Freelancing?
A side hustle can shift part of the return from wages to self-employment income. Think of an American employee in Berlin who earns a German salary during the week, then designs websites for US and UK clients in the evenings.
The freelance income may need to be reported as business income, with ordinary and necessary business expenses potentially deductible. Recordkeeping gets more important too, especially when payments arrive through different platforms or in several currencies.
The bigger surprise, however, is often Social Security tax.
Does the Foreign Earned Income Exclusion Cover Self-Employment Tax?
No. A qualifying self-employed person may use the FEIE to reduce regular US income tax on eligible foreign earned income, but the exclusion does not reduce US self-employment tax.
That does not automatically mean every US freelancer abroad pays into two social security systems. The US has Totalization Agreements with a number of countries designed, among other things, to prevent dual social security taxation. Depending on the agreement and the worker’s circumstances, coverage may be assigned to one country instead of both.
So, a side hustle that produces little or no regular US income tax after the FEIE could still carry a separate self-employment tax issue.
Does It Matter Where My Clients Are Based?
Less than many remote workers assume. For personal services, the source of the income is generally determined by where the work is physically performed, not where the client lives or where the money lands.
If that Berlin-based designer creates a website from Germany for a company in Chicago and is paid into a US bank account, the income is still generally sourced to where the services were performed. Split the work between countries, however, and an allocation may be needed.
What If I Set Up a Foreign Company for My Side Hustle?
This is where a small business can become an international tax issue fairly quickly.
A local accountant might suggest forming a limited company for perfectly reasonable local reasons. For a US owner, however, interests in a foreign corporation can trigger additional US reporting. Form 5471, for example, applies to certain US officers, directors, and shareholders of foreign corporations, while Controlled Foreign Corporation rules may affect some US shareholders.
The structure should therefore be reviewed from both sides before the company is formed.
When Should I Get Tax Advice?
Not every weekend project needs a complicated tax strategy. Still, it is worth reviewing the position when freelance income becomes regular, employment turns into contracting, a foreign company is being considered, or social-security coverage is unclear.
A side hustle has a habit of becoming a real business quietly. Sorting out the US tax treatment while it is still small is usually easier than untangling it after several years of growth.
