Confused about how exactly to report Foregin Earned Income

[Slavuta]

Hi!

I'm self-employed, all of my income is that of an independent contractor/freelancer, and I spent the entire 2019 living and working outside of the US, freelancing. So all of my income is Foregin Earned Income, and it does qualify for Foregin Earned Income Exclusion, meeting all the requirements.

Now, as I'm trying to file my returns using TurboTax, I can't work out whether I'm supposed to enter my Gross Receipts for 2019 both in the Business Income Section (Self-employed income) AND in the Foreign Income section or not. In other words, am I really supposed to enter the exact same earning (the same amount) twice -- once in each section? This seems counterintuitive. But it seems like that's what the rules imply. However, it all seems kind of vague, and I haven't found a straightforward answer to this anywhere.

The weird thing is, when I enter my total earnings twice (both under Business Income and Foreign income), even though it tells me I'm elgible for Foregin Earned Income Exclusion, the total amount of my tax owed is not reduced at all. And we get an odd situation where ALL of my income is Foregin Earned Income, and it's eligible for Foregin Earned Income Exclusion -- and yet there's no reduction in tax at all compared with if all of it was domestic income. This doesn't make sense to me. And given how low my gross income is, I would expect at least some break.

But I also noticed that TurboTax seems to be letting me to just enter all of my earnings under Foreign Income (and claim full exclusion for it) and leave Business Income blank. And then I owe no tax. The system doesn't seem to force me to enter any Business Income whatsoever. So which is the right way, I wonder? Please advise.

Thanks in advance!

[SusanY1]

The right way is first to enter your income as Business Income and then to exclude the income under the Foreign Earned Income Exclusion section of the program, where you will enter it again.

While you will not owe any income tax on the amount excluded as Foreign Earned Income you will still owe self-employment tax.  This will be equal to 15.3% of your net profit on the business.  The only way that this type of tax is not collected is if you are already paying a similar tax to your resident country on the same income and the United States has a Totalization agreement with that country for social security/social insurance taxes.  

You mention that your level of income is low, so it sounds as if it may be that you wouldn't owe income tax on your income even if you didn't exclude it as earned overseas.  This would explain why your numbers do not change at all.  You can check to see if this is the case by viewing your Tax Summary (under Tax Tools, then Tools in the menu on the left.)  If you see your tax due on the line for Other taxes this indicates it is referring only to the self-employment tax, which you must pay on your foreign earnings. 

In the section for the FEIE in TurboTax, be sure that you check the box that your income is from self-employment so that the interview will ask the appropriate questions and not duplicate your income.  That question should look like this:

[kmichaels]

I live in a country with a Totalization agreement (Canada) and have already paid Self Employment Taxes in Canada. However, when I got through what you described for foreign wages and self employment income, TurboTax still shows I owe Self Employment income. How do I indicate I've already paid it in Canada and therefore don't owe any in the US? Thanks!

[SusanY1]

The online version of TurboTax doesn't have a way to remove the social security tax, but it can be done in the downloaded version, found here: TurboTax download products.

Don't worry about all of the work you've done already though, you won't lose your work!  You can transfer the TurboTax data file by following the instructions found here: Transferring data from TurboTax online to desktop.

Once in the desktop version you can override the entry using the "Forms" mode.  You will click on the Forms icon in the upper right and then select Schedule SE and/or Schedule C to update the information.

@kmichaels

[kmichaels]

Thanks, Susan, that's very helpful. I have been working on a downloaded desktop Mac version.

Are you saying that Turbotax automatically adds the SE tax and I should go into the forms view and remove it/make it $0? Do I need to provide explanation or a certificate of coverage to do so? Thank you!

[SusanY1]

Yes, you need to remove the SE tax and override it to $0.   I recommend attaching your Certificate of Coverage to your tax return and filing by mail.  However, just be aware that the IRS often overlooks the extras attached to returns, so you may still find that they will ask for it at a later date.   Keep it in a location you can find it again easily for a few years (it may take them that long to catch up on many things!) in case they inquire.  

[kmichaels]

This is SUCH a huge help, thank you very much!!

[SusanY1]

You're welcome. 

I am sorry this is as complicated as it is, bit has to be in a way to avoid too many people accidentally removing self-employment tax and being penalized later.  

I'm glad we were able to get this resolved for you.    

[kmichaels]

UPDATE: There is an override button in the menu.

Hi Susan, So I've found the Sch SE form on Turbotax Deluxe on Mac. I've found the SE tax on the form but when I click on it, it wont let me change it. It says "calculated" in the top corner. Any suggestions on how to make the number editable? Thanks

[SusanY1]

I think I just found a better way - and this way may still allow you to e-File if you'd like.   Click on the "SE Adj Wks" (adjustment worksheet) and in Part II Line 7 enter the number that is your net profit (before you enter anything, this should be the number on the Line 8 just below.) 

This should zero out the SE tax for you without any override needed.  It will look similar to this (your entry will go in the box that is blue in this screenshot: 

[kmichaels]

That did the trick!! Thank you very much for all the help!

[SusanY1]

Great, glad to hear that!