Tax Year Prior to 2020: Report foreign earned income to Form 1040

[rjs]

For federal tax there are different income tax rates for different types of income. There is one set of rates for ordinary income, and a different set of lower rates for qualified dividends and long-term capital gains. Self-employment income is taxed at ordinary income rates, but is subject to self-employment tax in addition to income tax.

Here's a short summary of what rates apply to the specific types of income that you asked about.

Ordinary income rates apply to:

• Self-employment income
• Non-qualified dividends
• Short-term capital gains

The lower rates for qualified dividends and long-term capital gains apply to:

• Qualified dividends
• Long-term capital gains

Self-employment tax, in addition to ordinary income tax, applies to self-employment income.

For state tax, it depends on what state you are in. Each state has its own tax rates. I think that most states tax all income at the same rates. They do not have different rates for different types of income like the federal tax does.

TurboTax does figure this all out automatically.

[Sitkinyu]

Is the Self-employment tax an addition tax that you mentioned "SECA  ( at 15.3% for Social Security and Medicare taxes for the self-employed -- on about 92% of the net income)" in your post?

[rjs]

Self-employment tax and SECA tax are the same thing. On the tax return it's called self-employment tax.

[GrandPapaDau]

Hi.  I have a small schedule C business with a home office "Legal Research and Teaching".  My home office is in the US, I am a US Citizen, some of my income is in the US, but some of my income (and expenses) is earned teaching abroad (Taiwan and China).  Both Taiwan and China take taxes out of their respective payments. I also have another job in the US where I get a W2.  Where do I report my income from teaching abroad?  In the "Less Common Income" "Foreign Earned Income and Exclusion" or in the "Business Income and Expenses (Sch C)" or both?  Do I report the foreign income as not eligible for QBI?

[VictorW9]

Not schedule C, since you noted that you have been taxed already in Taiwan and China. Implied that you were actually employed in China and Taiwan, similar to receiving a W2 in the U.S. You have the option to use the Foreign Earned Income Exclusion or use the Foreign Tax Credit but you cannot use both. Choose the one that will give you the greatest benefit in your tax return.

[pk]

@GrandPapaDau ,  your post seems to suggest that  

(1) you have two sources of income-- (a) as an employee in the USA receiving a W-2     and     (b) as a self-employed / consultant   receiving  1099-MISC from US sources  and statement of payment from foreign sources.

(2) the foreign source income is earned for work done in Taiwan and  China where  the income is taxed by the local taxing authorities.

The question here regarding the treatment of the foreign income is whether  this is as an "employee"  or  as"self-employed".  This will determine whether it is to be reported on schedule-C or as  wages  with"statement of earnings".  Here you need to tell us your  contractual or other relationship  with the foreign entities  ( that paid you ).     Also what type of entity -- public / private etc. Just because taxes were collected at source does NOT make it an employer/employee relationship.

 Another question of import ( for purposes of  eligibility to exclude the foreign income  from US taxes  ) is  how long did you stay abroad to complete these "jobs" --- from your post it does not sound as if you you were abroad continuously  for more than 12 months .

Please answer  these questions and I will come back and follow up.

In general , though if all things work out , I would expect to see  filing of schedule-C covering the gross earnings from all sources and expenses covering  all expenditure for this stream of income.   Foreign taxes  paid ( and when finalized)  may be eligible for  foreign tax credit or deduction or other treatment, depending the exact facts and circumstances.  Also note that , absent a tax treaty allowance, self-employment taxes SECA   ( equivalent of FICA for wage earners  )  would be in play here.

[GrandPapaDau]

I am employed full-time by Indiana University and get a W2 for that.

I also earn honorarium and royalties in the US.

Between semesters or in the summer I have taught in Taiwan and China.  In Taiwan I have a contract with National Taiwan University and they withhold Taiwanese taxes (20%).  In China I have a contract with Peking University and they withhold Chinese taxes (about 30%).  I would say that I am more of an independent contractor in these teaching jobs.  I do not have full employee status or benefits and it is payment for teaching one course.  I have a lot of autonomous control over how the course is taught and what is taught and tested.

Both Universities also provide me on campus housing, and a plane ticket, but not food.

Regards,

[pk]

@GrandPapaDau  based on your response, I think you should be able to sustain an assertion that this self-employment and such use Schedule-C to report all earnings and expenses associated with this stream of income.   To claim the  foreign tax credit, you have to file form 1666  ( just tell TurboTax that these incomes shown on Schedule-C are of foreign source  and it will walk you through the filling of the form .  You should make sure that the  right amount of net foreign income -- before  local income taxes  -- has been transferred to form 1116 ).   You will also be subject to Self-Employment Taxes.

Does this answer your query ? or do you need more help ?

[GrandPapaDau]

Terrific!  Thanks!  I think I can do it now.  But foreign income not eligible for QDI?  Right?  Got to figure out how to take that out.

[KrisD15]

If you report it on Schedule C, the program will ask "How much of your "service" work took place in the United States? 

This is where it can be adjusted for the QBI deduction. 

[ColleenB]

I work overseas for a foreign employer and receive full paid benefits but they are labeling me as an Independent Consultant. I don't have an LLC or an S Corp. And when I say full paid benefits I get paid vacation, medical, pension, sick leave, etc. I believe I should be filing as an employee based on the above information. I tried calling the IRS which has actually been helpful to me in the past but now they just direct me to the website and I can't find an answer to this specific scenario. PLEASE Assist

[ColleenB]

I found my answer on the IRS website, Understanding Employee vs. Contractor Designation | Internal Revenue Service (irs.gov). I kept searching for anything official stating the difference between an employee and an Independent Consultant. It doesn't matter what an employer lists you as or has you agree to annual contract, if you are paid full benefits, you do a performance eval, work is regulated then you are an employee.

[pk]

@ColleenB , while the information you found on the IRS site is correct, however, there a few things to note here:

(a) IRS has jurisdiction and therefore its rulings/ opinions etc. apply ONLY to entities in the USA.  The employee definition  that IRS uses/enforces assures compliance with FICA requirements and tax withholding rules.  Thus  as an employer, the entity is required to pay 50% of the FICA  ( Social Security & Medicare ) , while employee bears the cost of the other 50%; is required to withhold  federal and state personal income axes  on "as earned " basis  per paycheck.

(b)  Foreign entities operate in compliance with local tax laws and definitions thereof.  They generally are not obligated to withhold US taxes, share FICA costs etc.  Thus while  you may be an employee ( under US Tax laws),  for US Tax  Purposes, neither the FICA nor the tax withholding ( Federal and State) are affected.  Many countries  have totalization agreements  with the USA , in order to ameliorate  the FICA burden --- often you pay into one country and this is given credit and/or adjusted in the other country.  The double taxation , again based on tax treaties between US and most countries, allows for exclusion of certain  wages & self-employment earnings from US taxes  upto a maximum and anything beyond this  exclusion limit is taxed by both countries and US gives foreign tax credit in order to ameliorate  the effects of double taxation.

Therefore , my conclusion is that whether you  are treated as an employee  or contractor  under the local laws  is immaterial  for US tax purposes. Your  worldwide earnings are still taxable income  subject to tax treaty conditions and foreign earned income exclusion plus foreign tax credit  rules and regulations.

Does this help  and/or is there more I can do for you ?

pk

[ColleenB]

Chanp

Three years ago I had switched to a foreign employer. When I had first done my taxes I had called Social Security to find out if I could voluntarily pay into my Social Security because they would not be taking out any of my taxes while I worked overseas. The reply was NO, the country I am working in does NOT have an agreement with the USA and I was told I would only be liable for Federal and any possible state taxes from my home state. That is why the question is very important on how to tell if I am an employee or a consultant. I currently get everything a direct employee gets but I sign an agreement each year stating I will be here another 365 days.

I work and live in the UAE but still have residence in the USA. I get a monthly fixed salary, pay for my own housing, etc., I get the tax credit because I am out of the country 330 days a year sometimes longer.

The big question is although I am doing a Schedule C is how do I do it? I don't get a 1099, because there is not a treaty I can't pay into FICA or Medicare, so the big question is the how much I am liable to Federal and State. If I am pushed as a 1099 I don't know how to do that because I don't have an entity, S-Corp, or a LLC.

[pk]

@ColleenB  thank you for all the information you have provided in your reply. I humbly say , I think that I understand the scenario/situation:

1. Per IRS definition you consider yourself to be an employee of a foreign entity in a foreign country with whom US has no tax treaty.

2. As an employee , SSA told you that you cannot pay employer share of the FICA -- generally true at least for  employees based in the USA ( except for US citizen employed by foreign  consulates / embassies in the USA ).

3. You do not know how to file a schedule-C  -- if you were to be considered as  self-employed for US tax purposes since you do not have a single  LLC or similar "dis-regarded" entity.

  There are two  things you have to do here ---

(a) Tell TurboTax that you have Self-Employed income.  This will open questions to fill out a Schedule-C  { this is used by sole proprietor/ self-employed and US Citizen/resident employees of foreign   govt. and some international  organizations ).  You can expense allowable expenses associated with this income stream ( if any ).   This will result in Schedule-SE being opened  so your tax bill includes  SECA  (  100% FICA  for self-employed ) taxes.

(b) you then also have to tell TurboTax that you have foreign earned income -- questions/guidance help you fill out form 2555.  Assuming that you qualify Physical Presence Test,  you will be eligible for Foreign Earned Income exclusion -- thus reducing US tax bite.  Generally foreign earned income exclusion is meant to ameliorate the double taxation -- in cases where   the foreign taxing authority taxes the income. However, thought many of the Middle Eastern  countries do not  have personal income tax for expats.  So this could be windfall for you.

Does this now make sense ?  Do you need more help ?

pk