Let's back track a little. You would report your business income and expenses in the wages and income section of your return. You would do this to pay the self-employment tax which is generally the same whether you are living in the United States or abroad.
Next you would combine the $20,000 earned from self-employment and your gross pay earned as an employee to determine your foreign income and exclusion. For the deductions, you can deduct such things as moving expenses, other business expenses, or the employer-equivalent portion of self-employment tax paid on self-employed earnings in a foreign country. Your self-employment tax has already been determined after you reported your Schedule C income as outlined in the first paragraph. Since the $20K is a net amount, you would not be deducting business expenses against your foreign income since these are already accounted for in the computation of your self-employment tax. You may deduct the amount of the self-employment tax though along with moving expenses to the foreign country if you moved in 2023.
As far as the employee business expenses, when I originally researched this, it mentions that business expenses can be deducted. On further research, this is a gray area at best. Employee business expenses are no longer deductible on Federal 1040 returns so as cautionary approach, you should not deduct these here. In fact in IRS Publication 54, it mentions "U.S. citizens and resident aliens living outside the United States are generally allowed the same deductions as citizens and residents living in the United States". Based on this, I retract my earlier statement and not report employee business expenses.
Now the last thing to do is to exclude $20K net profit from your US return since this will be foreign income you wish to exclude. Once this is excluded, all you have left is the self-employment tax which you are required to pay. To exclude this $20,000 from your US return go to.
- Select Wages and income>other income
- Miscellaneous Income, 1099-A, 1099>start
- Scroll to the bottom of the page to Other Reportable Income
- Other taxable income, answer yes
- Then give a brief description of the income, which is Self-Employment Income Reported as Foreign Income to be excluded and then enter the income as -20,000. Make sure the minus sign is placed in front of the amount.
A lot of information to digest so hopefully i made this clear.
@ned415
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