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I am living in Hong Kong but paying taxes as a US citizen to the US. The company I work for is in MA. Although I receive a 1099-NEC, in actual practice I am a part-time employee. I understand that I need to pay self-employment taxes (15%) to federal government, however it seems strange that I also need to pay self-employment taxes to MA state (15%). Doesn't the 15% I pay to federal government already cover my social security? On top of that it seems I need to pay income taxes to both the federal government (10%+) and MA government (5%+).

According to the Mass.gov website:

You need to file a Schedule C if:

You received a Form 1099-NEC for nonemployee compensation

Nonresidents - Report income from Massachusetts sources.

In that case it seems I have to face a crushing tax burden of roughly 40% (15% + 15% + 5% + 5%), even after factoring in the standard deduction on federal income tax.

Please inform me if my understanding is correct or I am missing something?

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    What 15% tax are you talking about? MA doesn't have any self-employment tax of 15%.
    – littleadv
    Mar 29 at 0:22
  • 2
    Also, "crushing tax burden of roughly 40%" - are you for real?
    – littleadv
    Mar 29 at 0:23
  • Crushing tax burden: If one didn't budget with that expectation, because one didn't understand US taxes, I can see where losing two dollars out of every five would feel crushing. Some countries tax other things more heavily and have lighter income taxes. If you are going to try to do business internationally, though, you should research this first.
    – keshlam
    Mar 29 at 5:11
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    You need to get it straight in your mind that you are not an employee of a Massachusetts company. Employees receive a W-2. Independent contractors receive a 1099-NEC for Non Employee Compensation. You are self-employed. Whatever filing instructions apply to employees do not necessarily apply to you.
    – MTA
    Mar 29 at 19:34

3 Answers 3

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First, as other answers have mentioned, Massachusetts does not have a separate self-employment tax. The federal Self-Employment Tax is simply the employer and employee parts of the FICA tax (i.e. Social Security tax and Medicare tax), and states don't have those taxes. (States may have other payroll taxes, however.) What you quoted about filing Schedule C concerns income tax (Schedule C is for reporting business income for calculating the income tax).

Second, it is not clear to me why you would be filing a Massachusetts tax return at all. Are you a tax resident of Massachusetts? If not, then you are only subject to Massachusetts tax on Massachusetts-source income, and income from work performed outside Massachusetts is not Massachusetts-source income. (There were some exceptions for people who worked remotely in 2020 and 2021, during COVID-19, but that is not relevant here.) Where the company is located is irrelevant.

Also, by the way, you would probably not need to pay your whole federal income tax either -- if you qualify to use the Foreign Earned Income Exclusion (i.e. 330 days outside US during any 12-month period, or bona-fide tax residence in another country), you can exclude the federal income tax on the first $120k or so of foreign earned income.

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  • Thank you for helping me see I don't have to pay such high taxes! Although 40% may not seem high to people in Europe and rich people in the US, it is much much higher than Hong Kong. Yes, I think you are right, as I asked another expert and he also said the same thing. It's where I am located while performing the work that matters for state taxes, not where the company I work for is located.
    – Philip
    Mar 30 at 5:10
  • @Philip: I added an unrelated but useful note about the Foreign Earned Income Exclusion
    – user102008
    Apr 2 at 6:13
  • I see; maybe I am wrong, but I was under the impression that if I work for a company in the US, I still need to pay federal income and SS taxes, even though I am working from Hong Kong.
    – Philip
    Apr 2 at 10:47
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    @Philip: You still need to pay SS and Medicare taxes as part of Self-Employment Tax, because you are working for yourself, a US person. (And if you were an employee working abroad for a US company, you would need to pay SS and Medicare taxes too.) And you are still subject to federal income tax because you are a US citizen. But you can use the Foreign Earned Income Exclusion to reduce or eliminate your federal income tax on foreign earned income. Your income is foreign (no matter if you are self-employed or an employee) because you performed the work while abroad.
    – user102008
    Apr 2 at 14:28
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Massachusetts does not have a separate self-employment tax. There is only the federal tax.

Some sites may give the wrong impression about this. A quick Google search turns up multiple sites that seem to have just copy-pasted their whole "self-employment tax" article (or someone else's article) for every single US state and find-and-replaced the location name, making it look as if any state you look up has its own 15.3% self-employment tax. However, this is misleading. You do not have to pay a separate Massachusetts self-employment tax.

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  • Haha, I think you are right, some websites give completely wrong information.
    – Philip
    Mar 30 at 5:10
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There are many websites which give a general idea of how much tax you should be expecting to pay. The first one I happened to stumble across that focused on 1099 consultants (not an endorsement!) was everlance.com/tax-calculator. They quote about 30% as typical US federal tax for folks in your situation, going up as you earn more since the US uses a marginal tax rate system.

If you owe state tax as well, that may indeed bring it up to 40% of your gross income. In some places there may be local city/town income taxes as well, though most towns fund local government with a real estate tax instead.

It's your responsibility as a contractor to understand this well enough to set your rates appropriately so your net after taxes is OK, just as you're expected to set them high enough to cover the things that a salaried employee gets as additional benefits (such as health insurance), and to ensure that you can save enough money to survive periods between ending one contract and starting the next one. If you didn't do so, all I can suggest is that you learn from the experience and fix it in your next contract.

Welcome to the contracting business, specifically contracting for US companies. You didn't do your homework before starting, so you're learning the hard way... but now you have a better idea of what to expect.

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