As an interpreter, you are likely to be faced with two circumstances relevant to your tax liability -- freelance work and income earned overseas. Both involve tax consequences that you can use to your advantage, and both involve potential pitfalls. Many of your business expenses can be deducted from your taxable income, and you may be able to deduct all of your foreign-earned income from your United States taxable income.
Income Earned Abroad
The foreign-earned income exclusion is designed to avoid double taxation. It is available to U.S. taxpayers who earned money while physically located overseas. It will not apply unless you meet complex IRS foreign residency rules, which generally require you to spend most of the tax year abroad. If you qualify, you may exclude up to $92,900 in foreign-earned income from your U.S. taxable income (prorated by the portion of the tax year you spent abroad.) If you don't qualify for the foreign-earned income exclusion or if you exceed the maximum exclusion, you may instead credit foreign taxes paid against your total tax liability.
If you are a freelancer, you may deduct a wide variety of business expenses from your taxable income. These include travel expenses and business mileage, home office expenses, business entertainment, advertising expenses, training and professional development expenses, and business equipment (such as a laptop). Certain limitations apply -- for example, you may deduct only 50 percent of business entertainment expenses, and these expenses must be reasonable. Claiming excessive or dubious write-offs may attract an IRS audit.
Employers deduct Social Security and Medicare taxes from their employees' paychecks and must also contribute an amount on behalf of each employee. If you are self-employed, you have no employer to make these deductions. Consequently, you must pay a self-employment tax of 13.3 percent (as of 2011).
To claim the foreign-earned income exclusion, file Form 2555 with your Form 1040 tax return. File both forms even if all of your income is excluded and you owe no taxes, because you can lose the exclusion if you fail to claim it. If you wish to credit foreign taxes paid against your U.S. tax bill, file Form 1116 and Form 1040 instead. When you file Form 1040, you will need to complete Schedule C to claim self-employed business expense deductions. If you are self-employed, you must also file Form 1099 quarterly and pay quarterly estimated taxes.