Foreign Earned Income

[mircpa]

Hello Everybody

I have a client who is US citizen, provided professional services to a company outside US in amount of 125k, was outside US for 71 days to render this services, i try to fill out form 2555, part VIII, line 45 is coming to 16K, which i understand is prorating 85.7K maximum foreign income exclusion, based on days outside providing services, which is carrying to form 1040 line 22 as negative 16K, my question is this ok, does 125k needs to flow through 2555 to 1040 and end up as income at first place ?, also is this not regarded as self employment income showing up on Schedule C ? Client has W2 and other income reportable on 1040

I appreciate any help if somebody provides

[Pacun]

Sch C and Sch SE for $125K

[mircpa]

thanks Pacun

I have one more follow up question, on this transaction, there were 18K foreign taxes withheld, i understand i need to attach form 1116 and take foreign tax credit, on top of 16K foreign income exclusion from 2555. thanks again

[Pacun]

thanks Pacun

I have one more follow up question, on this transaction, there were 18K foreign taxes withheld, i understand i need to attach form 1116 and take foreign tax credit, on top of 16K foreign income exclusion from 2555. thanks again

I am waiting for peer review but you should also check the tax treaty between the US and the other country.

[jainen]

>>outside US for 71 days<<

This taxpayer does not qualify for ANY exclusion because he was not outside the country for 330 days or a full tax year. You can't prorate that basic requirement, only the number of days of the qualifying period that fall within a particular tax year.

Whether it is self employment or not depends on the ordinary factors, but seeing as he only had this single assignment I would expect it to be line 7 wages.

[RoyDaleOne]

If Foreign taxes were withheld was Foreign SS also covered?

[mircpa]

No, Foreign taxes were withheld, not they are not SS taxes, that is why i am tilting towards Sch C Income. Can i attach 2116 and take credit ?

[mircpa]

No, Foreign taxes were withheld, not they are not SS taxes, that is why i am tilting towards Sch C Income. Can i attach 2116 and take credit ?

I mean 1116

[Maura]

Whether it is SCH C income or reported as wages on line 7 of 1040 depends on how it was reported. What type of form did he receive from the foreign company? Yes you will use Form 1116 for the tax credit. But remember it will be only for the taxes he actually pays. Is he entitled to any refund? Has he filed a return with the foreign country? Is he required to?

[jainen]

>>they are not SS taxes, that is why i am tilting towards Sch C Income<<

That's no good, mircpa. The IRS has published the 20 common law factors to determine independent contractor status, and a foreign country's retirement system is not on the list.

In fact, even withholding FICA has little relevance to the question. And neither does "how it was reported" as Maura says. The IRS has posted its own training manual at http://www.irs.gov/pub/irs-utl/emporind.pdf . It points out that courts have clearly ruled that a W-2 is not conclusive evidence one way or the other. And if you can't use that for U.S. employers, what difference does it make how they write it up overseas?

As for the foreign tax credit (or deduction), sure, that's probably available unless he was working in Libya or was otherwise not eligible.

[Maura]

There are agreements in place with the US and foreign countries which protects workers from having to pay into 2 separate social security schemes. If he was treated as a worker then he is not subject to SE tax here. If he was an independent contractor then he is subject to SE tax here.

[mircpa]

There are agreements in place with the US and foreign countries which protects workers from having to pay into 2 separate social security schemes. If he was treated as a worker then he is not subject to SE tax here. If he was an independent contractor then he is subject to SE tax here.

He is regarded as independent contractor, providing professional services, due to this reason i intend to transfer this amount to Sch C, I did read the tax treaty between the other country (India) and US, and according to this, US is going to tax on this amount not India, I read publication 54 also