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stevef
Level 2

Taxes on Foreign Income

My wife was approached by a former colleague who is now working for a foreign company. He would like her to do administrative work for him as independent consultant. She would be paid via electronic transfers from a foreign bank account.
My wife and I are both residents of Delaware. I am living off my pension and 401K. My wife is seeking employment in DE so this would likely not be her only source of income.
My question is whether and/or how to report this income on our Federal and/or State Tax returns. I don’t believe she will be receiving a 1099 from this company.
If this income is required to be reported, should she report it on a Schedule C and submit estimated quarterly Federal and State taxes on this income?
Also, should she also make Social Security and Medicare payments on this income and at what rate?

1 Best answer

Accepted Solutions
BenT9
Level 3

Taxes on Foreign Income

You have it right.  She will have to file a Schedule C to report her income received for Federal and Delaware.  When you file a Schedule C you can deduct any expenses she might have - in her case office supplies? or whatever.   The income shown on Schedule C is not only subject to income tax but also self employment tax.  Self employment tax is really social security and medicare.  When employed you pay half of these and your employer pays half.  When self employed you pay the entire 15.3%.  Half of this is deductible on your tax return.  This 15% is included with the tax you owe on your return and if there is withholding from another job or source it will reduce the amount you must pay.  Any amount estimated to be due, that is over and above what is covered by withholding, is required to be paid via quarterly estimated tax payments.  Besides deduction half of the 15.3% a self employed person can avail themselves of other deductions.  Since this business is performed in your home a home office expense is possible.  A SEP pension plan can help reduce that income tax  due as well as a provision that allows the person to deduct health insurance.  There is also a 20% reduction of taxable income available for Qualified Business Income.  This does not apply if the business performs certain types of service.   These are Specified Service Trades or Businesses or SSTB.   This should be easy to research to see if your wife is performing a non SSTB and therefore qualifies for this beneficial 20% deduction.

A rule of thumb is to look at the tax rate applied to your joint return income (this is not the average rate but the rate on the highest bracket.) and add 15.3%.  This indicates the tax she will owe and she can either pay it quarterly or set it aside for when she files your first tax return that includes her business.  For Delaware do the same - use the highest tax bracket - but of course no additional 15.3%.   Paying quarterly state taxes during the year means they are deductible during that year.  State income tax on the business's income are deductible by the business so making estimated payments is a good thing.  You can even make the 4th Quarter state tax payment in the current year rather than January of the following year to deduct this currently.  Any state tax paid that exceeds the state tax computed on the business's earnings are deductible as an itemized deduction.  Chances are you don't itemize or if you due your deductible state taxes exceed the $10,000 allowed (Delaware is a high tax state) so they won't do you any good.  But the tax on her business income is a good deduction from her business income and reduces the self employment tax.

I think I got carried away but hope you can follow this.  The fact that the income is foreign has no bearing on your taxes.  If she gets paid in the foreign currency she must convert it to US $ on the day she receives her payments and report the income.  If for some reason foreign tax is withheld from what she is paid she can credit it against her US tax.  A credit usually reduces her US tax dollar for dollar.  I think you said she will be paid in dollars.

 

View solution in original post

5 Replies
BenT9
Level 3

Taxes on Foreign Income

You have it right.  She will have to file a Schedule C to report her income received for Federal and Delaware.  When you file a Schedule C you can deduct any expenses she might have - in her case office supplies? or whatever.   The income shown on Schedule C is not only subject to income tax but also self employment tax.  Self employment tax is really social security and medicare.  When employed you pay half of these and your employer pays half.  When self employed you pay the entire 15.3%.  Half of this is deductible on your tax return.  This 15% is included with the tax you owe on your return and if there is withholding from another job or source it will reduce the amount you must pay.  Any amount estimated to be due, that is over and above what is covered by withholding, is required to be paid via quarterly estimated tax payments.  Besides deduction half of the 15.3% a self employed person can avail themselves of other deductions.  Since this business is performed in your home a home office expense is possible.  A SEP pension plan can help reduce that income tax  due as well as a provision that allows the person to deduct health insurance.  There is also a 20% reduction of taxable income available for Qualified Business Income.  This does not apply if the business performs certain types of service.   These are Specified Service Trades or Businesses or SSTB.   This should be easy to research to see if your wife is performing a non SSTB and therefore qualifies for this beneficial 20% deduction.

A rule of thumb is to look at the tax rate applied to your joint return income (this is not the average rate but the rate on the highest bracket.) and add 15.3%.  This indicates the tax she will owe and she can either pay it quarterly or set it aside for when she files your first tax return that includes her business.  For Delaware do the same - use the highest tax bracket - but of course no additional 15.3%.   Paying quarterly state taxes during the year means they are deductible during that year.  State income tax on the business's income are deductible by the business so making estimated payments is a good thing.  You can even make the 4th Quarter state tax payment in the current year rather than January of the following year to deduct this currently.  Any state tax paid that exceeds the state tax computed on the business's earnings are deductible as an itemized deduction.  Chances are you don't itemize or if you due your deductible state taxes exceed the $10,000 allowed (Delaware is a high tax state) so they won't do you any good.  But the tax on her business income is a good deduction from her business income and reduces the self employment tax.

I think I got carried away but hope you can follow this.  The fact that the income is foreign has no bearing on your taxes.  If she gets paid in the foreign currency she must convert it to US $ on the day she receives her payments and report the income.  If for some reason foreign tax is withheld from what she is paid she can credit it against her US tax.  A credit usually reduces her US tax dollar for dollar.  I think you said she will be paid in dollars.

 

View solution in original post

stevef
Level 2

Taxes on Foreign Income

Thank you for your response. It provided just the information that I needed.

aramin98
Level 1

Taxes on Foreign Income

Hello.. I am in the same situation. My question is what form is needed in Schedule C to enter earned income received from a foreign entity/company? Is there an equivalent form to 1099 misc? If not what are the main steps to enter it in Schedule C? Thanks

JotikaT2
Employee Tax Expert

Taxes on Foreign Income

Since you are reporting this income as self-employment income, you will do the following in the Federal interview section: 

  1. Select Income & Expenses 
  2. Select Self-employment income and expenses 
  3. Proceed through the screens to enter your information 
  4. When you see the following for income, make sure to select"Other self-employed income.  Includes 1099-K, cash, and checks." 
  5. Even though you do not have an actual 1099 form, you can use your bank statements or deposits, invoices, etc to record the amount of your income received in 2019.  Just be sure to retain your support for the amounts in the return.
  6. You will also be able to add your expenses for your business in this section.
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aramin98
Level 1

Taxes on Foreign Income

Many thanks for your response and information. 

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