1099 FOREIGN EARNED INCOME

[David]

TP is filing for the foreign income exclusion on Form 2555 for his 1099 income. Not all of the 1099 income will be excluded since the income exceeds the max foreign income exclusion amount.

Shouldn't the SE tax also be excluded to the extent of the max foreing income exclusion amount? I can't find how to exclude the income on the SE schedule.

Please advise.

Thanks for your help.

[PatHack]

With regrets, there are two separate tax systems (1) social security taxes and (2) income taxes.  The self employment income is subject to SE tax (social security tax) no matter where the US person performs the work, even though the net income is subject to exclusion under the Foreign Earned Income from the US income tax.  However, if the TP is in a country that also charges a social security tax (eg the UK) that the TP pays in the other counrty, he may exclude the SE income from US social security tax under the US-UK treaty/Totalization agreement   There are other countries with Totalization agreements with similar affect to US taxpayers, but not many.   Otherwise, depending upon the costs, there's potential planning to set up a company and have the TP be the sole employee to avoid the SE tax.

[Margaret CPA in OH]

PatHack, this is so timely. I am trying to complete a return for a couple from Germany and just received a copy of their German return. It shows a small amount of SE income in Germany for each of them. I will look up this Totalization agreement that you mention to be sure of proper treatment and be sure of the tax items on the return in case there is a comparable SE tax assessed in Germany.

Oh, the things we learn here from each other!

[PatHack]

If you determine that the TP is subject to the Totalization agreement on the income, the Sch SE provides the following instruction:

 

If your self-employment income is exempt from SE tax, you should get a statement from the appropriate agency of the foreign country verifying that your self-employment income is subject to social security coverage in that country. If the foreign country will not issue the statement, contact the SSA at the address shown in (3a), earlier. Do not complete Schedule SE. Instead, attach a copy of the statement to Form 1040 and enter “Exempt, see attached statement” on Form 1040, line 56.

 

In ATX, I override the line 56 and insert 0 if the Totalization Agreement applies.  Otherwise, in ATX you can put the income exempt from SE tax on the detail tab for line 3 on Sch SE