Foreign tax credit for remote work

[jiawen]

Hi,

My wife is a foreign citizen. She lived in her home country and worked for a company there from 2018 to 2022. Then she moved to US at the end of 2022. Because that company supports remote work, she continued to work for the same company remotely after she moved to US. It's fully remote work and she lived in US for the whole 2023. She got salary from the foreign company and paid tax to the foreign government in 2023.

We're wondering if we shall report her salary as foreign income and the tax paid to foreign government as foreign tax credit. We intended to use form 1116 to record this, but we just found the requirement is that ---- the foreign earned income/credit could only be used when it sources to where service is performed. We're not sure what does "perform" mean here.  Can we report foreign income/credit here?

What's more, if we can record them as foreign income and foreign tax credit, besides the income tax, she also paid social security tax to the foreign government including retire insurance/medical insurance/unemployment insurance, how shall we handle those? It should be part of gross income or part of credit? 

We're really confused here. Thanks in advance for your help! 

[DaveF1006]

To clarify, what country is she a citizen of?

[jiawen]

Hi @DaveF1006 ,

Thanks a lot for the reply. She is a citizen of China.

[pk · Accepted solution]

@jiawen , having read through your post  and the Q & A from my colleague @DaveF1006 , and being familiar with US-China Tax Treaty,  would like to refer you to articles 4, 13 1nd 14 of the  ref'd  treaty.

Specifically,  China  taxes  residents ( and not like US -- citizens ).  Article 13 and 14 also  refers to "employment executed " implying it allows taxation ONLY by the contracting state where residence is  ( as long as it is more that 122 days.  Thus my conclusion is that per the treaty China should not be taxing your wife's wages  earned from work performed in the USA.   Also IRS  follows the same principle  that the source of the income is where the work is performed.

Suggest you contact the employer  to not tax her income  for the work done while situated in the USA.

Please read through the treaty and the articles  ref'd herein.  It is available  at www.irs.gov and search for "tax treaty".

Is there more I can do for you ? 

[jiawen]

Hi @pk ,

Thank you very much for the help! Really appreciate it! I'm clear now. Just one more quick question, shall I report these as foreign income in Turbotax online or as other reportable income? And shall I include everything including her medical insurance/unemployment insurance/retire insurance as her gross income? Thanks a lot. 

[pk]

@jiawen , sorry to say it is a bit more complicated.

Assuming that she has been paying Chinese Social Security Equivalent for the year 2023 :

(a)  show her income -- it is domestic because the work was performed  in the USA -- as "self-employed" i.e. use Schedule-C showing the gross income in US$, and deduct all allowable expenses associated with this income stream ";

(b) the net income will flow on to  Schedule-SE  ( SECA at 15.3% of most of the net income  and equivalent to FICA -- Social Security & Medicare taxes  ) and compute that  SE tax.   If she was covered for the  year by the chin ese equivalent, then she will need to get a "certificate of participation " from China so that she is not paying twice.

(c) As far as foreign tax goes  -- thin k you should talk to her employer to see if they can refund that to you because per the treaty it should not have been taxable income in China.  But the usual red tape may negate that hope.

I don't know if you would be successful in  using form 1116, , resource the income by treaty and take the foreign tax credit -- because that usually requires a foreign tax home.  IRS will probably argue that  as a resident of US, this treaty assertion is not viable.  That is why I am suggesting  discussion with the employer.

Is there more I can do for you ? 

[jiawen]

Hi @pk ,

Thanks a lot for the details! I understand that her income should not be considered as foreign income and she could not use form 1116 to declare foreign tax credit because she lives in US. And we shall talk to her employer to try to get refund from chinese government. For this part, I'm clear now. Thanks again for your elaboration!

However, I'm a little confused about where to report her wage income. You mentioned that we shall report it as "self-employment". According to IRS, there are only following 3 conditions:

• You carry on a trade or business as a sole proprietor or an independent contractor.
• You are a member of a partnership that carries on a trade or business.
• You are otherwise in business for yourself (including in a part-time business or as a gig worker).

That's her full time job. And because it's a foreign company, she did not get W-2. I feel like she does not satisfy any of the above 3 conditions. I'm thinking can we use other reportable income category to report her wage income? What do you think? Thanks a lot!

[pk]

@jiawen , your wife needs to categorize herself as self-employed for purposes of  recognizing this  income --- this will allow her to deduct any allowable expenses associated with this income stream and also allow for the self-employment tax that I mentioned earlier.

Does that make sense ?

[jiawen]

Hi @pk ,

I think I get your point now. Thanks again for your great support!

[pk]

@jiawen , if you are satisfied that your query has been answered , please accept this  so that the thread closes.  Else tell me what more I can do for you on this subject, please.

pk

[jiawen]

Hi @pk and @DaveF1006 ,

Just marked one of the comments from pk as best solution. thanks again for your help!