U.S. TAX GUIDE IN BRAZIL
How do you report self-employment income from Brazil on US taxes?
If you’re self-employed in Brazil—meaning you’re working as a freelancer or an independent contractor—you’ll need to report your income on your US tax return; you’ll use Schedule C (Profit or Loss from Business) and file it alongside your Form 1040.
Schedule C is where you list all your income from self-employment, then subtract your business-related expenses to figure out your net income.
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Do you have to pay US self-employment taxes?
Normally, yes, you’d be required to pay self-employment taxes (around 15.3% for Social Security and Medicare) on your net income.
But there’s good news: because of the totalization agreement between the US and Brazil, if you’re already paying into Brazil’s Social Security system, you can avoid paying these taxes to the US.
What is the totalization agreement?
The totalization agreement between the US and Brazil is designed to prevent double taxation of Social Security.
If you’re contributing to Brazil’s Social Security system, you’re exempt from paying US Social Security taxes on your self-employment income. This can significantly lower the amount of taxes you owe.
Do you need to file additional forms?
Yes, you’ll need to file Form 8858 if you have foreign self-employment income. This form is used to report income from foreign disregarded entities (FDEs) or foreign branches. Failing to file Form 8858 when required can lead to significant penalties.
What happens if you don’t file Form 8858?
Not filing Form 8858 can result in serious penalties, which can be as high as US$10,000. Many expats aren’t aware of this requirement, so it’s important to ensure all your forms are filed correctly to avoid these penalties.
Can you deduct Brazilian business expenses on your US tax return?
Yes, you can deduct business expenses incurred in Brazil on your US tax return, just as you would if you were operating a business in the United States.
The IRS allows self-employed individuals to deduct ordinary and necessary business expenses directly related to their work.
When you file Schedule C (Form 1040), you can list various business expenses such as office rent, utilities, supplies, travel expenses, and other costs related to running your business.
However, it’s crucial to keep accurate records and receipts for all expenses to ensure that you can substantiate these deductions if the IRS ever asks for proof.
One thing to keep in mind is the potential difference in tax treatment between the US and Brazil. For example, certain expenses might be deductible in Brazil but not in the US, or vice versa. Additionally, expenses must be converted from Brazilian Reais to US Dollars using the appropriate exchange rate.
What is the deadline for filing US taxes if you’re self-employed in Brazil?
If you’re a US citizen living in Brazil and self-employed, the deadline to file your US tax return is typically April 15th. However, the IRS automatically grants US expats an extension until June 15th to file their taxes.
But, if you owe any taxes, interest will still start accruing from April 15th, even though you have until June 15th to file your return.
If you need even more time, you can request an extension until October 15th by filing Form 4868. However, this extension only applies to the filing deadline, not to the payment deadline.
For self-employed individuals, it’s important to also be aware of the estimated tax payment deadlines. Since self-employed workers don’t have taxes withheld throughout the year, you’re required to make quarterly estimated tax payments.
These are typically due on April 15th, June 15th, September 15th, and January 15th of the following year. Missing these deadlines can result in penalties.
What exchange rate should you use when reporting Brazilian income on US taxes?
When reporting your Brazilian income on your US tax return, you must convert it from Brazilian Reais (BRL) to US Dollars (USD).
The IRS requires that all amounts reported on your tax return be in USD.
To do this, you should use the exchange rate that was in effect on the day you received each payment.
However, if you received income regularly throughout the year, such as weekly or monthly payments, you’re allowed to use an average exchange rate for the year. The IRS provides yearly average exchange rates that you can use for this purpose, which can simplify the reporting process.
If you opt to use the daily rate, you can find exchange rates from sources such as the US Treasury Department or other reputable financial websites.
Make sure to keep consistent with whichever method you choose, and retain records of the exchange rates used in case the IRS requests verification.
