Schedule C requested even though I qualify for foreign income exclusion

[nickjlow]

Sole trader living and working abroad for the past few years.  I am well within the qualification for the foreign income exclusion but am now being asked to fill out a schedule C even though turbo tax says I don't do this if I qualify for FIE.  Worried I'll be double taxed on the already small income I have.

[Critter-3]

If you are self-employed you report your self-employment on Form 1040 Schedule C regardless of where you perform your self-employment work.  Turbotax will calculate any self-employment tax you may owe based on your Schedule C entries.

Once you have completed Schedule C and know your net income you will report that income on Form 2555.  If you qualify for the Foreign Earned Income Exclusion (FEIE) your self-employment will not be taxed.  Your income may be excluded from income tax but you will still have to pay any self-employment tax to exclude the income if you qualify.

[nickjlow]

So my total income which is taxable in Australia at 33% will additionally be taxed another 15% to the U.S. because I am self employed?

[rjs]

The United States has social security agreements with a number of countries, including Australia, to eliminate dual taxes under two social security systems. Under these agreements, you generally must pay social security and Medicare taxes to only the country in which you live. This means that your self-employment income in Australia is exempt from U.S. self-employment tax if you paid the equivalent Australian social security tax on your self-employment income. You have to get a statement from the Australian government agency that handles the tax, verifying that your self-employment income was subject to the Australian tax.

TurboTax doesn't really handle this situation. There is a way handle it using forms mode, but forms mode is available only in the CD/Download TurboTax software, not in TurboTax Online. So in TurboTax Online there is no way exclude the self-employment tax. Post back if you want detailed instructions for doing it in the CD/Download TurboTax software. If you do it this way, you will not be able to e-file your U.S. tax return. You'll have to print it and file it by mail.

Even if you are exempt from self-employment tax, you still have to include Schedule C to report your self-employment income. The exemption only eliminates Schedule SE.