How to Report Spouse’s Foreign Self-Employment Income in MFJ

[kruthika]

I am a U.S. resident alien filing as Married Filing Jointly (MFJ) with my husband, who is a self-employed sole proprietor in India. He lives in India, his business is based there, and he has no U.S. income or clients. He doesn't even have SSN and I'm applying ITIN for him. I want to correctly report his income in TurboTax and determine if he qualifies for the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC).

1. Should I enter his income under Self-Employment Income & Expenses (Schedule C) or under Foreign Earned Income & Exclusion (Form 2555)?
2. Will he be subject to self-employment tax (15.3%) in the U.S., or does India’s Totalization Agreement provide an exemption?
3. Since he pays income tax in India, would the Foreign Tax Credit (Form 1116) be a better option than the FEIE?
4. If FEIE applies, how do I ensure TurboTax calculates it correctly?

I want to make sure I report his income correctly and minimize double taxation. Any guidance would be greatly appreciated!

[pk]

@kruthika , Namaste ji

What I get from your post :

1. You a US Person ( Resident for Tax purposes / GreenCard ), having a tax home in  US

2. Your spouse  is Indian citizen & resident  ( for purposes of the Tax Treaty ) is self-employed and is taxed in India.

3. You wish to file as MFJ

MFJ filing would require  

            (a)  A request signed by both filers, asking for the NRA to be treated as a Resident for Tax purposes.

            (b) the spouse to have US Tax ID (TIN ).

4. Note that  while this MFJ would  get you a higher  standard deduction  ( assuming you are not eligible  for head-of-Household filing status ), it would also the tax rate  of  your  US sourced income.  This is because  TurboTax will  first compute  the tax liability on the joint world income and then deduct from it the  tax  levied on the excluded income.

5. Also note that once the spouse has requested to be treated as a resident, it  remains valid  till  for the future years.   So one needs to look at the longer term  benefits.

6.  While  FEIE is available  for the  NRA spouse because of  foreign tax home ( form 2555 ),  the  Schedule-C  ( for sole proprietor/self-employed )  is prepared under US tax laws  and may be different  than under  Indian Tax laws.

7.  And yes because  of Totalization agreement between US-SSA and India , one need to pay  SECA to only one country ( with a certificate of participation from the other  country ).

Does all the above make sense ?   Is there more I can do  ?  You can either respond here or PM  me  -- especially if there are items that are not of general interest -- just NO  PII  ( Personally Identifiable  Information)

Namashkar ji

pk

[DaveF1006]

Yes, he can apply the Foreign income Exclusion, take the credit, or a combination thereof. Currently, the US does not have a totalization agreement with India according to this source so he would be subject to the self-employment tax in the US.  Here are some things to consider.

1. US Taxpayers living in other countries have the option of taking a foreign tax credit or Foreign income Exclusion.(FEIE)
2. If the Foreign Earned income Exclusion is elected, each taxpayer on a return may exclude up to $126,500 of their income in 2024.
3. Foreign Earned income eligibility is based on the Physical Presence Test or Bonafide Presence Test. 
4. If the Foreign Earned Income exceeds $126,500, a taxpayer is eligible to take a foreign tax credit for the remainder of income beyond the $126.500 limit.
5. If the foreign tax rate is fairly low, it may be more advantageous to exclude your foreign income because the foreign tax paid is insignificant. 
6. If the foreign tax rate is high however, it may be more advantageous to take the foreign tax credit (FTC) especially if the foreign income is high.

So now, you probably wondering how to report this?  Here is the order that I suggest. First report the Foreign income and see if it can be excluded.

1. Click on Federal 
2. Click on Wages and Income  
3. Scroll down to Less Common Income
4. On Foreign Earned Income and Exclusion, click on the start or update button. 

Now report this income on a Schedule C by going to Business Income and Expenses.  Here you will report his income and expenses to determine the self-employment tax. After this is complete, you will exclude the net income amount by doing this. 

1. Select Wages and income
2. Less Common income
3. Miscellaneous Income, 1099-A, 1099>start
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Then give a brief description of the income and the amount listed. Here you will list this as Foreign Self-employment income excluded and record the net income as a negative number by placing a minus sign in front of the amount. All that is left in your return is the self-employment tax and an adjustment in Schedule 1 deducting 1/2 of the self employment tax.

If you decide to claim the foreign tax credit if a portion of his income is over  $126,500, you will report that here.

Go to Federal

1. Deductions and credits 
2. Estimate and other taxes paid 
3. Foreign Tax Credit>start or revisit

As far as Turbo Tax reporting this accurately, we do have an accuracy guarantee policy in place. Please select that link for further information.

[DaveF1006]

Yes, he can apply the Foreign income Exclusion, take the credit, or a combination thereof. Currently, the US does not have a totalization agreement with India according to this source so he would be subject to the self-employment tax in the US.  Here are some things to consider.

1. US Taxpayers living in other countries have the option of taking a foreign tax credit or Foreign income Exclusion.(FEIE)
2. If the Foreign Earned income Exclusion is elected, each taxpayer on a return may exclude up to $126,500 of their income in 2024.
3. Foreign Earned income eligibility is based on the Physical Presence Test or Bonafide Presence Test. 
4. If the Foreign Earned Income exceeds $126,500, a taxpayer is eligible to take a foreign tax credit for the remainder of income beyond the $126.500 limit.
5. If the foreign tax rate is fairly low, it may be more advantageous to exclude your foreign income because the foreign tax paid is insignificant. 
6. If the foreign tax rate is high however, it may be more advantageous to take the foreign tax credit (FTC) especially if the foreign income is high.

So now, you probably wondering how to report this?  Here is the order that I suggest. First report the Foreign income and see if it can be excluded.

1. Click on Federal 
2. Click on Wages and Income  
3. Scroll down to Less Common Income
4. On Foreign Earned Income and Exclusion, click on the start or update button. 

Now report this income on a Schedule C by going to Business Income and Expenses.  Here you will report his income and expenses to determine the self-employment tax. After this is complete, you will exclude the net income amount by doing this. 

1. Select Wages and income
2. Less Common income
3. Miscellaneous Income, 1099-A, 1099>start
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Then give a brief description of the income and the amount listed. Here you will list this as Foreign Self-employment income excluded and record the net income as a negative number by placing a minus sign in front of the amount. All that is left in your return is the self-employment tax and an adjustment in Schedule 1 deducting 1/2 of the self employment tax.

If you decide to claim the foreign tax credit if a portion of his income is over  $126,500, you will report that here.

Go to Federal

1. Deductions and credits 
2. Estimate and other taxes paid 
3. Foreign Tax Credit>start or revisit

As far as Turbo Tax reporting this accurately, we do have an accuracy guarantee policy in place. Please select that link for further information.

[Edited 02/27/25|11:45 am PST]

[kruthika]

Thanks Dave for answering. But I'm still confused.

In turbo tax I'm seeing two options

       1. Self-employment income and expenses

       2. Foreign Earned Income and Exclusion

My doubt is whether I should fill up the numbers from his business income (from India) information in option 1 or option 2 under the income and expenses section. As both as completely different effect. I'm trying file the tax as MFJ and so he gets treated as resident alien and he will get his ITIN as well. 

Option 1 - I'm seeing tax payable amount increasing.

Option 2 - I'm seeing tax payable amount decreasing. 

In my understand option 1 is for US self-employed individuals right? Since my husband is self-employed but in India I thought maybe I need enter his business income details in option 2. But I just want to double check before I file my tax returns.