Abroad (S. Korea) Freelance/Self Employment Income Exclusion (or Foreign Tax Credit)

[shanesnh]

Hi. I have worked in S. Korea for a few years (as an employee) and qualified for the Foreign Earned Income Exclusion for those years. I am contemplating doing some freelance tutoring in the future as my visa allows it now but I assume that freelance/self-employment work CANNOT use the FEIE, right? I know there is another exclusion but I don't know well about it (Foreign Tax Credit I think?) 

Do I have to pay social security/medicare (FICA, whatever) and normal US income tax if I work in South Korea (ROK) with self-employed income paying taxes on it in South Korea or is there a tax credit or exemption similar to how I excluded my earned-income w/ FEIE in previous years?

If I'm going to get double taxed, it's not worth it and I won't do it. I assume I won't be since many expats do it. Thank you.

[tagteam]

@pk

[pk]

@shanesnh ,  Foreign Earned income  covers both employment  and self-employment.  Thus you can still use FEIE.  You just have to fill out a Schedule-C, as you would if you were a self-employed in the USA.

The question of FICA/SECA is dependent on whether the foreign country has a "totalization" agreement with USA.  I don't remember if South Korea has one or not ( but I would be very surprised if it did not ).  If that is place , you can pay the US SECA and get a cert from SSA to show Korea that you are covered by the USA  or you can do the other way -- depending on your longer term plans.

Does this make sense ?

pk

[shanesnh]

Hi,

So, foreign self-employment can also qualify under the FEIE? What if someone does both a main job and a side (self-employed) job? Can they collectively put all of it under the FEIE? It usually only asks for one job and the address on the TurboTax thing for the FEIE.

I read this FEIE vs. Foreign Tax Credit: Which One to Choose? (1040abroad.com)

and it says that I'd still have to pay self-employment taxes (so FICA/SECA) but yes, I read somewhere that the ROK has the totalization agreement w/ the US. But if I file Schedule C, isn't TurboTax (and the IRS) going to charge me FICA/SECA (so over 15% of my income even though it is foreign and should be covered under the FEIE)? How do I "prove" to TurboTax or whatever that the agreement is there and thus have it lower the FICA/SECA/etc. liability back down to 0 as I'm already paying the equivalent of all of those taxes/pension/etc here in Korea? (I'm staying in Korea and will not have access to US social security or any of that... paying into the Korean National Pension Service instead). 

I don't know how to do this in TurboTax or what version it requires. It really should all be one free version like every other country but oh well, I use the Deluxe version (even though I have a 0 tax balance for previous years in Korea). I just want to know this because I might want to do private tutoring or self-employed stuff if I can.

[SusanY1]

Yes, you can combine your self-employment income with your income from an employer to calculate the foreign-earned income exclusion (FEIE).  

You're correct that Form 2555 only allows you to enter one employer (and you can only file one form per taxpayer).  I recommend that you enter the information of your primary employer for the form.  

In TurboTax, you must manually add your net profit from self-employment to your foreign wages to calculate that exclusion properly. 

Ordinarily, you would be able to exclude the income from tax under the FEIE, but would owe self-employment tax.  Since you live in a country that has a Totalization Agreement with the US, however, you are able to remove this tax with proof that you're participating in the national pension plan. 

To remove the self-employment tax, you will need to file your return by mail and attach to your return a "certificate of coverage" obtained from your resident country's social insurance program office.  This tax will also need to be manually removed in TurboTax.  

Using a desktop/download version of TurboTax will be easier than using an online version to make manual adjustments.  Any desktop/download program version will have the forms you need for this. 

[shanesnh]

Thank you for your answer.

First question: In the instance that I have BOTH regular employment and self-employment income: What about Schedule C? How could I add the self-employment net income into the normal wages amount and also on Schedule C? Wouldn't it be duplicated then?

Second question: If I only have self-employment income, how would the FEIE work (again with the same question about Schedule C)

Third question: How do I make the two manual adjustments? 1. Adding net profit from self-employment to your foreign wages) and 2. Removing the self-employment tax. 

Fourth question: If I do make manual adjustments such as removing the self-employment tax, do I need to notate it somewhere as to why I am doing so alongside a "certificate of coverage" obtained from the Korean National Pension Service? (I'm not even sure exactly what to ask them for but they do have a form in Korean that shows that you are registered and for how long, etc. so I assume that would work unless it needs to be translated. Not sure if they have an English one.) 

Fifth question: Is it better to use an actual tax professional instead of just doing it on my own? I don't know if TurboTax has any expat services. I don't even owe US tax which makes it frustrating.

I might have more questions later. Thanks in advance. @SusanY1 

[SusanY1]

During the interview process for TurboTax, you will first enter all income from self-employment (along with expenses), foreign partnerships, and any income reported on a W2.  Foreign earned income not reported on a W2 is the only income entered in the section for the exclusion.  

The exclusion interview section will ask you to input your net profit from your self-employment income.  In this section it is not adding to your income but simply indicating the amount of income that you wish to exclude.  You will also need to remove the adjustment to foreign income for one-half of the self-employment tax during the interview phase. 

You will likely need to override the self-employment tax directly on Form 1040 and delete Schedule SE (this requires the desktop/download version of TurboTax).  At this time, forms are still awaiting approval, so I cannot test that in the 2023 product to see if there is an easier way.  

You need a specific certificate to attach to your tax return to show that you qualify to exclude self-employment tax on your return.  This must be requested from the National Pension Service of Korea.  For your wages as an employee, your employer must apply for the certificate on your behalf.  Self-employed persons in Korea obtain it directly from the National Pension Service. I found some additional information on obtaining the certificates HERE.  (Please note that I am generally familiar with this process, but I am not personally familiar with obtaining the certificates in your resident country.)  

TurboTax does not have an expat tax service at this time.  While this means our full-service experts cannot prepare your return, TurboTax software can certainly handle your return with some manual input.  

When you're working on your tax return, please return to the Community to post questions as they arrive, and one of our employee experts or a knowledgeable member of the Community can offer the assistance you need to complete your tax return yourself.