Foreign Earned Income and Exclusion won't apply to our overseas self-employment income even though Turbotax says the income qualifies... can't seem to make it apply??

[ghuete1]

When entering in the information, it says our full amount of self employment income qualifies for the foreign earned income and exclusion, but on the Federal income page, it just shows $0, and then taxes us on the self employment full amount, drastically reducing our return amount.  Any help is appreciated!

[ThomasM125]

Although you may qualify for exemption from income tax on your foreign income, it is still subject to self-employment (social security) tax, which is about 15% of your self-employment net income. That may be why your refund is reduced when you add your self-employment income. The self-employment tax is listed on line 4 of Schedule 2. 

You can view your form 1040 and schedule 2 while working in the online version of TurboTax by following these steps:

While working on your return in the Federal section of TurboTax:

   1.  Choose the Tax Tools icon on your left menu bar

   2.  Tools

   3.  View Tax Summary

   4.  Choose the Preview my 1040 on your left menu bar

[ghuete1]

Hi Thomas,

My spouse works entirely in Germany for a self-employed and registered German business, not a US company.  According to the Totalization Agreement between the US and Germany, a self employed person who works only in Germany pays only German social security taxes, which my spouse does.  How do we make sure this carries through in Turbotax?

https://www.ssa.gov/international/Agreement_Pamphlets/germany.html

[ThomasM125]

I don't know of any way to exempt yourself from self-employment tax if you report income on a schedule C. If you aren't deducting any expenses you could report the income as "Other Income" and it wouldn't be subject to self-employment taxes. You do that in TurboTax in the Wages and Income section, then Less Common Income, then Miscellaneous Income, then Other Reportable Income. You could report it there and mention the treaty in the explanation.

@ghuete1 

You need to include form 8833 with your return where you can explain what you are doing.

[Edited 2/9/22 at 12:51 PM PST]

[AmeliesUncle]

You can go into the Self Employed Worksheet and enter the business profit as a negative number.  I know it can be done using the CD/downloaded version, but I am unsure about the online version.

However, there is more to it than that, and you tax return will need to be mailed if you use TurboTax.  See below.

To establish that your self-employment income is subject only to foreign social security taxes and is exempt from U.S. self-employment tax, request a certificate of coverage from the appropriate agency of the foreign country. If the foreign country will not issue the certificate, you should request a statement that your income is not covered by the U.S. social security system from the U.S. Social Security Administration. Attach a photocopy of either statement to your Form 1040 each year you are exempt from U.S. self-employment tax. Also print "Exempt, see attached statement" on the line for self-employment tax.

https://www.irs.gov/individuals/international-taxpayers/self-employment-tax-for-businesses-abroad