For Australian readers, there's a second catch. Self-employment tax is a US concept: the federal Social Security and Medicare tax on business profit. It sits apart from Australian income tax, GST, the Medicare levy, superannuation and every other ATO obligation. You need to assess each system on its own.
This guide covers who normally pays, what falls outside the tax, and how the US-Australia agreement works. It also shows how an exemption changes filing and benefits.
Key Takeaways
- Being self-employed, serving overseas clients or living outside the US does not create an automatic exemption.
- Interest and ordinary rent sit outside the SE tax base; genuine exemptions need a test or IRS approval.
- Exempting SE tax usually leaves income tax and reporting intact.
- Verify current IRS, SSA, treaty and ATO requirements before relying on any position.
What Is Self-Employment Tax and Who Normally Pays It?
How self-employment tax works
For 2026, the regular rate is 15.3%: 12.4% Social Security plus 2.9% Medicare. The 2026 Social Security wage base is $184,500, according to IRS Publication 15. Medicare has no general cap.
Schedule SE applies a 92.35% multiplier to net profit and is required once net SE earnings reach $400.
An Additional Medicare Tax of 0.9% applies above $200,000 for single filers and $250,000 for joint filers, based on the 2025 Form 8959 instructions.
Gross receipts, accounting profit and net SE earnings are not interchangeable. Sole proprietors work out profit on Schedule C after allowable expenses, then carry it to Schedule SE.
The deduction for half of SE tax reduces adjusted gross income. It does not reduce the SE tax itself.
Who is normally subject to the tax?
- Sole proprietors, independent contractors and freelancers
- Partners, on their distributive share of business income
- Members of LLCs taxed as sole proprietorships or partnerships
A label isn't enough. The IRS looks at behavioural control, financial control and the relationship between the parties, and either side can file Form SS-8 for a determination.
Hypothetical example: Mia, a Melbourne designer, is a US citizen. She invoices a UK client through an online platform and receives no Form 1099. Neither fact removes her US exposure. What matters is her US status, her net earnings and any coverage rules that apply to her.
Who Qualifies for a Self-Employment Tax Exemption?
Income that falls outside SE tax
Some income isn't an "exemption" at all. It simply isn't earnings from a trade or business. Under IRC section 1402, the following are generally excluded:
- Employee wages, which fall under employment-tax rules
- Interest and dividends, unless received in a dealer business
- Capital gains on property not held for sale to customers
- Real-estate rents, subject to statutory exceptions
Rent is not universally exempt. If you provide substantial services mainly for tenants' convenience, such as regular cleaning, the activity may belong on Schedule C and attract SE tax.
Business structures and participation levels
- Limited partners generally exclude their distributive share, except guaranteed payments for services.
- LLC members depend on the entity's federal classification and the member's role.
- S corporation shareholders generally exclude pass-through income from SE tax. The company must still pay shareholder-officers reasonable wages; the IRS can reclassify distributions.
Corporate form is not a blanket exemption.
Religious and ministerial exemptions
Clergy, members of religious orders without a vow of poverty and Christian Science practitioners may apply on Form 4361. Requirements:
- Conscientious opposition, based on religious principles, to public insurance for ministerial services
- Filing by the due date (with extensions) of the return for the second year with $400 or more of net SE earnings, any part from ministerial work
- IRS approval. Without it, SE tax remains due
Economic reasons or a wish to cut tax don't qualify. The exemption covers only ministerial earnings, not other self-employment income.
The SSA notes that exempt ministerial earnings cannot later earn Social Security credit, so weigh this before applying. Form 4029, for members of recognised religious sects, is a separate exemption that includes a waiver of benefits.
Other narrow exceptions
All of these are fact-specific, not elections:
- Notaries: fees for official notarial acts are generally outside SE tax, while travel, printing and loan-signing fees may not be, per the Taxpayer Advocate Service.
- Executors: occasional fees for a relative's estate aren't SE income if you're not in the executor business.
- Former insurance salespeople: section 1402(k) termination payments qualify only if strict conditions are met, including a one-year non-compete.
- Nonresident aliens: generally not subject, unless a Social Security agreement brings them into US coverage.
- Occasional activity: infrequency alone is not an exemption. Profit motive and other facts decide business versus hobby.
Special Situations for Australian and Cross-Border Taxpayers
An Australian resident may face US SE tax if they hold US citizenship, are a US tax resident, run a US business or have another US filing link. The location of your client, bank account or payment platform doesn't settle it.
The US-Australia Social Security Agreement
Effective 1 October 2002, the agreement assigns coverage to one country. Under it, a US national who lives in Australia and is self-employed is not subject to US Social Security laws. The SSA describes such people as exempt from US SECA tax.
- The SSA issues certificates of coverage for the US; the ATO issues them for Australia.
- The SSA pamphlet describes requesting an exemption letter if you're a self-employed US citizen in Australia.
- Keep the evidence on file in case of questions.
This is a totalization agreement, not an income-tax treaty. The treaty's saving clause preserves each country's right to tax its own citizens and residents.
The foreign earned income exclusion does not remove income from the SE calculation.
What stays in place
A US exemption doesn't switch off Australian obligations:
- Residents must declare foreign income.
- GST registration applies at A$75,000 turnover.
- The Medicare levy is 2% of taxable income.
- Sole traders don't pay super guarantee for themselves but may make personal contributions.
A foreign income tax offset may reduce Australian tax for foreign tax paid. It is an ATO mechanism, not part of Schedule SE.
How an Exemption Affects Filing, Deductions, and Benefits
Filing still applies
Income that escapes SE tax usually still gets reported. Rental and partnership income flows through Schedule E and Schedule K-1, and Schedule SE is where SE tax is calculated. Some 2026 IRS forms may still be drafts, so use the final version issued for your filing year.
Exemption versus other tax reducers
| Item | Affects |
|---|---|
| Business expenses | Net profit, so SE earnings fall |
| Half-SE-tax deduction | Income tax only |
| Retirement contributions | Income tax, not SE earnings |
| Foreign tax credit (Form 1116) | US income tax only |
| Foreign earned income exclusion (Form 2555) | Income tax only; SE tax ignores it |
IRS Publication 514 also bars a deduction or credit for foreign Social Security taxes paid to a country with a US agreement.
Practical consequences
- Self-employed people generally pay quarterly estimates using Form 1040-ES, and an exemption changes that calculation.
- In 2026, one Social Security credit requires $1,890 of covered earnings, and 40 credits are generally needed for benefits, per the SSA credits page.
- Premium-free Medicare Part A generally needs about 10 years of Medicare taxes.
- Form 4361 earnings earn no later credit, but don't assume every exemption works that way. Check with the SSA.
Practical Eligibility Checklist
A short decision process
- Identify your country of residence and US status (citizen, resident, nonresident).
- Classify the work: employee, contractor or owner.
- Determine the business structure and any tax election.
- Separate active earnings from passive income.
- Check whether a specific exception, agreement or approval applies.
Documents to gather
- Contracts, invoices and payment records
- Entity documents and partnership agreements
- Rental records
- Prior returns
- Form 4361 approval, if relevant
- A certificate of coverage or SSA exemption letter
Getting a second opinion
If you have Australian-US income, entity or accounting questions, you can seek a cross-border review from VJM Global. The firm supports tax compliance and accounting for international businesses, including US individual returns (Form 1040 and 1040-NR).
Any advice should rest on your complete facts.
Frequently Asked Questions
Does a freelancer need to pay taxes?
Generally yes. Freelancers assess ordinary income tax and, where applicable, self-employment tax. Foreign residence or foreign clients don't automatically remove filing obligations.
What makes you exempt from self-employment tax?
A specific income exclusion, business-structure rule, statutory exception, totalization position or approved religious exemption. Being a freelancer or wanting to cut tax isn't enough.
Is self-employment tax the same as income tax?
No. It's the US Social Security and Medicare tax, separate from ordinary income tax. One can apply while the other is reduced or eliminated.
Can you be exempt from self-employment tax but still owe income tax?
Yes. An exemption generally concerns the SE tax component only. The underlying income may remain taxable and reportable.
Does living in Australia exempt you from US self-employment tax?
Not by itself. Citizenship, US tax status, entity, income type and the Social Security agreement all matter. A self-employed US citizen living in Australia may be covered by the agreement's exemption.
Do employees pay self-employment tax?
Generally no. Wages from genuine employment go through employment-tax withholding, though misclassification is a risk. Employees still owe ordinary income tax.
