Self-employment tax: a benefit or a burden?

One of the biggest surprises our freelancer clients run into is this: you can still owe U.S. self-employment (SE) tax even if you haven’t lived in the United States for years. That often becomes the centerpiece of our planning conversations—especially for Americans who are fully integrated into Germany’s tax system and assume “Germany taxes cover everything.”

What self-employment tax actually is (and why it shows up)

U.S. self-employment tax is essentially Social Security + Medicare for people who work for themselves. The headline rate is 15.3% (12.4% Social Security + 2.9% Medicare), and it’s the self-employed version of the payroll taxes that would normally be split between employer and employee in the U.S.

A couple of quick reality-check details that matter in practice:

• SE tax is calculated on net earnings from self-employment (with a built-in adjustment—generally 92.35% of profit is subject to SE tax).

• The Social Security portion is capped at an annual wage base; the Medicare portion is not.

(Those mechanics don’t change the point of this post—they just explain why the math on a return sometimes surprises people.)

This is the most common question:

Shouldn’t German taxes offset this? German rates are higher than U.S. rates.

Here’s the key distinction: the Foreign Tax Credit is for income tax, and self-employment tax is not income tax—it’s a Social Security/Medicare tax. So even if you pay substantial German income tax via your Steuererklärung, that will not reduce U.S. self-employment tax.

A simpler way to say it:

German income tax can often reduce your U.S. income tax. It won’t touch SE tax.

The real “treaty” piece: the U.S.–Germany Totalization Agreement

Where the U.S.–Germany relationship does become highly relevant for SE tax is the Totalization Agreement (Social Security coordination), not the income tax treaty.

The IRS is very direct here: to show that your self-employment income is subject only to Germany’s social security system (and therefore exempt from U.S. SE tax), you generally need a Certificate of Coverage from the appropriate agency.

This is where things get nuanced for freelancers in Germany: not every freelancer is automatically covered by the German statutory pension system, depending on profession and circumstances. If you’re not actually covered (and can’t obtain a certificate of coverage), U.S. SE tax may still apply—despite living abroad.

There can be a planning opportunity here, but it’s not as simple as “opt into a German pension and get out of SE tax.”

The operative standard is coverage under the German social security system plus the documentation (certificate).

In practice, some clients decide that paying U.S. SE tax is the cleaner route; others prefer aligning fully with Germany’s system when they’re eligible and properly documented.

Bottom line

For U.S. freelancers in Germany, SE tax can feel like an unexpected “extra layer” that shows up at filing time. We don’t love delivering that news—but it’s better to discover it proactively than through penalties or years of compounding confusion.

If you’re freelancing in Germany and want to know whether SE tax applies to you—and whether a Totalization Agreement exemption is realistically available—a consultation can usually clarify this quickly.