How do I pay Social Security on foreign earned income based on the totalization agreement US Italy

[2382680]

As a non-Italian citizen living in Italy with US citizenship I wish to take the Foreign Earned Income exemption on income tax which I have already paid to the Italian government but NOT on contributions to Social Security, because I choose NOT to contribute to the Italian pension system.

[Anonymous_]

@pk ?

[Critter-3]

Sorry but you cannot have it both ways ... you need to put the earned income on the Sch C to pay into the SS system as desired.   You cannot use the foreign income exclusion  but you can use the foreign tax credit on form 1116. 

[pk]

@2382680 , agreeing with the comments  from @Critter-3  to the general theme, I still am not quite sure of your  earnings situation.  So ,  let me put down what I understand  --

(a) you a US person  ( citizen ), are living in Italy

(b) you wish to take advantage of foreign earned income exclusion  -- because your earnings are foreign, , you have a tax home in Italy and presumably you meet the requirements of Physical Presence Test ( form 2555) ;

(c) you also wish to NOT participate in the Italian equivalent Social Security and  therefore because of the Totalization agreement between US and Italy, you wish to pay FICA taxes  to the US only.

Assuming the above describes your situation at hand ,  the easiest  would be to :

1. enter your gross foreign source  income ( i.e. before taxes  ) as if you are self-emplyed -- Schedule-C.   This will automatically prepare a Schedule-SE for the FICA/SECA taxes  ( at 15.3%  on most of your gross income);

2. You also have to prepare a form 2555 for exclusion of the foreign income

3. Get a certificate of coverage  from US -SSA to show to Italy ---- see more details here -->

      https://www.irs.gov/government-entities/federal-state-local-governments/totalization-agreements

Does this cover your query ?  Is there more I can do for you ?

pk

[2382680]

@pk thank you, you have exactly described my situation, and I have already obtained the certificate of coverage from SSA. My remaining questions are:

1. If I enter my gross Italian source income under the TurboTax Self-employment income and expenses -- Schedule-C -- rather than under Foreign Earned Income and Exclusion -- Form 2555 -- as I have done in past years, how do I indicate that the income tax on that gross income has already been paid in Italy? (**My italian employers do not issue a 1099 so I will also need to somehow explain where the income comes from without an employer TIN.)
2. I believe that, in my 2022 filing, I did not pay the appropriate amount of FICA to the US for the Italian income, for the reason indicated above. How can I rectify this?

Thanks again!

[DaveF1006]

it depends. Please read this IRS document to clarify your question. To claim the foreign income exclusion, you may either enter this income other income or self-employment income and also will be reported on Form 2555..  If you enter as self employment income, this will reduce your income tax but you would still owe self-employment taxes. Also you do not need your Italian employer EIN to report this on a Schedule C.

Also according to this unofficial reference, employees of a foreign company are not subject to FICA taxes while working outside the states, unless you work abroad for a US-based company.  I think this provision is germane to your situation.

@2382680

[jtax]

Are you employed or self-employed? If employed, is your employer a US company or a non-US company?

I think you should probably seek professional advice and review the US-Italy totalization treaty in detail.

SSA has a summary -- https://www.ssa.gov/international/Agreement_Pamphlets/italy.html

It seems to clearly state that

• if you are a US National working in Italy for a non-us employer, you are covered by the Italian social security system and do NOT have the option of electing US coverage.
• if you are a US National working in Italy for an US employer or are self-employed the you are covered by the US SSA and do NOT have the option of electing Italian coverage.
• the option to choose seems to only apply to dual nationals or Italian nationals resident in the US.

Be careful with reporting employee income in TT as self-employment just to generate a 1040-SE and FICA liability. If you aren't actually self-employed that isn't correct and could ripple through your return in other ways.

One professional firm to consider is https://www.greenbacktaxservices.com/knowledge-center/totalization-agreements-tax-treaties/ ... I know others who have used them on other matters. 

[2382680]

Thanks@DaveF1006 and @jtax . As a US person living in Rome and working as a self-employed educator for various Italy-based study centers (ie without a permanent contract with any one entity) I believe I am considered to be working for an American employer, so self-employment tax (FICA) applies in the U.S. But I do not see how, using the Turbotax software, I can enter this as self-employment income without having it automatically added to my gross taxable US income as opposed to Foreign earned income, which would be exempt from double taxation. Ie, how to ensure it is reported on Form 255? Any clarification appreciated!!!!

[jtax]

Thank you for the clarification. If you are a US citizen working in Italy as an independent contractor, I agree that the SSA summary of the totalization treaty says you are covered by US SS and not Italy. And you have no choice in the matter. But I have not reviewed the actual treaty.

[rest of reply removed. not quite right. stay tuned]

[jtax]

Re: how to enter. 

You enter your self-employment income and expenses as you would if you were a in the US. It will show up on Schedule C and flow to your 1040 and Sch SE.

Then go through the foreign earned income exclusion (FEIE) interview and enter your SE income and expenses. See screenshots below.

Also the  FEIE is pretty complicated. For example if qualifying based on the 330 day test, only 1 day has to be in the tax year. Very odd. If you wind up with any US tax owed (other than SE tax) you might want to try the foreign tax credit instead of the FEIE. It is differently complicated and might be better. But if the FEIE gets rid of your US tax liability you're good.]

[Remember you must convert to USD. If only a couple of items you should use the actual exchange rate on the day. But for a lot of items or small items, you can use the average annual exchange rate. https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates]

[2382680]

Thanks again @jtax, I followed your promts through and, unfortunately, even after an hour on videoconference with a TurboTax specialist, there appeared to be no way to accomplish my two goals: To pay Social Security and Medicare contributions on both my US income and my Foreign earnings as a self-employed educator, while avoiding double-income taxation on the foreign earnings (I am already paying Italian tax but not Italian Social Security on these earnings, per the Totalization agreement). It seems that I must either pay taxes AND SS on the foreign income - the formula you proposed - or accept the income exclusion on the foreign earnings and effectively pay neither US nor Italian Social Security - not good for my long term Social Security compensation rate. At least wihin the limits of TurboTax software these are the only two options. I am awaiting reply to a written inquiry on this directly from SSA. 

[jtax]

@2382680 I don't see that.

In a test return with only $50k in foreign Schedule C income, the FEIE, I see no tax on the $50k. Well, almost. Since you want to pay FICA anyway, it is harmless that the FEIE is reduced by $3533 to $-46,467 because of the deduction for half of FICA paid. (1040 line 10 from Schedule 1, line 15/26). 

So there is no tax on the $50k. Just the FICA from Schedule SE. 

So I don't understand what you are seeing.  What is your Schedule 1, line 8d from 2555 line 45?

Here's some screenshots from my test return:

Schedule C:

Schedule C

2555=p3

schedule SE

1040

[2382680]

Thanks again @jtax , I would love to share the Schedule 1, line 8d from 2555 line 45 info but I don't see a way to view the draft return as your screenshots show. All I have to work with is the questionnaire. If you see the following as an error in reporting or know how to show the draft return prior to paying and filing, please let me know.

We both qualified for the FEIE:

And in the self-employed income category (see below) I left this amount blank because I had already declared the FEI in a prior section:

I am unsure how to know whether, on the 1040, the excluded income will show on Schedule C . But Turbo Tax shows a Federal Tax due amount that is considerably less than the12.4% Social Security tax on my gross income. 

Sincerely, @2382680 

[jtax]

@2382680 without access to the forms we're just chasing our tails trying to figure out *why* you're not seeing what you expect and whether that is correct or not.

Here is an FAQ on how to get at the forms on the online version:

https://ttlc.intuit.com/turbotax-support/en-us/help-article/import-export-data-files/save-2021-turbo...

As an aside this is why most of us volunteers never use the online version. The desktop version gives you quick access to the actual form, you can right-click (on windows) on a calculated number and (often) find out where that number came from/hyperlink to its source.  The downside of the desktop software is that you are in charge of keeping your data files both around and secure for next year and you have to install the software on any computer you want to work on.

[2382680]

@jtax if you have not completely lost patience with me I have now accessed the printed preview and can say that Schedule 1 Foreign earned income exclusion from Form 2555 . . . . . . . 8d amount is 96,893 - which is all of our joint FEI.

And to match the screenshots you shared previously, here are

Form 2555 p. 3:

and Schedule SE:

Compared to your hypothetical I seem to be paying self-employment tax on a Net profit or (loss) [from Schedule C, line 31] that is much lower than the combined self-employed US earned and Foreign earned income I am reporting. If the total due of $3,800 (Sch. SE line 12) seems right then my problem is solved. But a basic calculation of Form 2555 line 45:  64,745*12.4% =   8028.38 tells me I may be missing something. 

You are very kind to have stuck with me thus far. Any further help is a tremendous act of altruism!!!