How can I avoid double taxation on my self-employment income earned abroad using TurboTax?

[hijyoon]

I’ve been living in South Korea since November 2020 and I run my own business here. I already filed and paid all applicable income taxes to the Korean government. I'm a U.S. citizen and I’m now trying to file my U.S. taxes using TurboTax.

However, TurboTax keeps calculating additional U.S. tax on my foreign self-employment income — even though I’ve already paid taxes in Korea. I don’t have any U.S.-sourced income, and all of my income is from my business in Korea.

How can I properly report this to avoid double taxation?

I’ve heard about:

• Form 2555 (Foreign Earned Income Exclusion)

• Form 1116 (Foreign Tax Credit)

• Reporting business expenses on Schedule C

But I’m confused about how to apply these correctly in TurboTax. Also, am I still required to pay U.S. self-employment tax (Social Security and Medicare) even though I paid everything in Korea?

I’d really appreciate clear, step-by-step guidance or screenshots if anyone has done this before. Thank you!

[pk]

@hijyoon , 

(a)  On your question of Self-employment taxes levied by both South Korea ( your tax home ) and USA  ( your citizenship home ), please see details  here -->  Totalization Agreement with Korea | International Programs | SSA

(b) On your US taxes on self-employment / sole-proprietor earnings in Korea --

   1. You do have to file US tax return for each calendar year -- US federal return on form 1040.  TurboTax is quite capable to help you prepare and file the return.

   2.  Since your tax home is Korea, you can take advantage of Foreign Earned Income exclusion -- FEIE -- on your Korea sourced income.   

               (A)    You do this by first preparing a Schedule-C  ( sole Proprietor / self-employed ) covering  your income in Korea.  Note here that this is prepared per US tax laws i.e. you start with your gross income and you report all deductions/expenses  per  US rules which may or may not be the same  the ones for Korea.  You can download a copy of Schedule-C  ( see  here --  2024 Schedule C (Form 1040)  ) and instructions for the same here ---2024 Instructions for Schedule C (2024) | Internal Revenue Service.

              (B)  Next you go the incomes section of TurboTax, choose  " I will select what I work on " and then from the list of income categories, select   " Foreign Earned Income Exclusion ".  This would  walk you through a series of screens  for filling out form 2555.  Note here your foreign sourced income is the net income from schedule-C -- just make sure that this is not double counted.

             (C) the net result of this should show  on your form 1040 -- your schedule-C  income under business income and then the excluded income --- See  Schedule--1  --( lines 3 for business income and   line  8 d  for form 2555 mediated exclusion amount)     --- >  2024 Schedule 1 (Form 1040).

 Hope this helps in your preparing and filing your 2024 return.

Note that  this is best done using  windows downloaded  TurboTax  -- my favorite being Home & Business.

From your post I am not clear if  you needed help only on the 2024 return or did you need to go back all the way to 2020.

Is there more I can do for you ?

[rjs]

After following the instructions that pk gave you, you will still have self-employment tax on your U.S. tax return. See the following to remove the self-employment tax.

How do I pay zero Social Security (SS) taxes due to a totalization agreement?

You will not be able to e-file your tax return. You will have to print your tax return, sign it, and file it by mail. Attach the certificate of coverage from the Korean National Pension Service after all the IRS forms and schedules.

The instructions at the link above will remove Schedule SE from your tax return and remove the self-employment tax from Schedule 2 line 4. But one more step is needed, which TurboTax will not do. You have to write "Exempt, see attached statement" on Schedule 2 line 4. The only way to do this is to write the notation on Schedule 2 by hand after you print your tax return.

Since you have removed the self-employment tax, you might not have any other entries on Schedule 2, in which case it will not be included in your tax return. If that happens, print a blank copy of Schedule 2 and write the notation on it. Include it in your tax return after Schedule 1, or after Form 1040 if you do not have Schedule 1. If you are using the desktop TurboTax software you can print Schedule 2 from TurboTax in forms mode. If you are using TurboTax Online you can download a blank Schedule 2 from the IRS web site.

[rjs]

In the instructions at the link that I posted above, step 2 for getting to Schedule SE might not work. If not, go to Federal Taxes > Other Tax Situations > Business Taxes > Self-Employment tax.