Is there a way to reduce self-employment taxes to account for totalization agreements?

[MarilynG1]

@shirinjnk If you want to get the Earned Income Credit, you have to report Earned Income, so you would need to report your Self-Employment Income on Schedule C. 

You would also need to pay the Self-Employment Tax on this income.  Any overrides will prevent efiling. 

If you paid tax on this income to a foreign country, take the Foreign Tax Credit to avoid being double-taxed.

Click this link for info on How to Claim the Foreign Tax Credit. 

[shirinjnk]

Thanks but SE tax will not go away with 1116, I have to manually overwrite or back it out with claiming the same amount in losses. I know I cannot e-file. I was just wondering if it would be ok to override SE tax to zero, not attach Sch SE (as recommended by IRS), and claim the earned income in schedule C, and therefore receive the EITC.

[DaveF1006]

Yes, but if you claim earned income in Schedule C, you will need to pay SE tax thus need to include the Sch SE. The double-taxation treaty was designed for a taxpayer not to have to pay federal income tax in two countries that have a tax treaty. Too my knowledge, this does not include FICA Taxes. 

[shirinjnk]

You’re right but I found that IRS says this:

”If your self-employment income is exempt from SE tax, you should get a statement from the appropriate agency of the foreign country verifying that your self-employment income is subject to social security coverage in that country. If the foreign country won’t issue the statement, contact the SSA Office of International Programs. Don’t complete Schedule SE. Instead, attach a copy of the statement to Form 1040 or Form 1040-SR and enter "Exempt, see attached statement" on Schedule 2 (Form 1040), line 4.”

So they are asking for SE not to be attached and instead the certificate should be attached. 

I just would like to know that since I did have “earned income” , and was present in the US for 11 months, can I claim EITC with no Sch SE attached per IRS’ instructions?

[JeffreyR77]

Earned Income Tax Credit is one of the most closely scrutinized credits by the IRS. 

Your situation is certainly not in the most common seen by the IRS. 

Your claim to be exempt from US Social Security and Medicare tax due to coverage by another country while you were present and self-employed in the US 11 months of the year is uncommon. 

To be eligible for EITC you must be a citizen or resident alien the entire year.

[levon90]

You can manually adjust the foreign SE tax-related business income using negative values losses under: 
Other tax situations -> Business Taxes -> SE tax 

At the same time, mind that IRS will require you to have a 'foreign certificate of coverage' for such SE tax payment avoidance + leave notes under your SE form (wherever you find appropriate in TurboTax). 

I don't think reporting losses in such a way is how it is supposed to be done officially, but this is the only technical way if you still want to e-file using the free TurboTax version.

[supertaxing]

>Don’t complete Schedule SE. Instead, attach a copy of the statement to Form 1040 or Form 1040-SR and enter "Exempt, see attached statement" on Schedule 2 (Form 1040), line 4.”

This seems to be the correct answer for the original poster's question (eteraoka)?  But I am not an expert.  I just spent a few hours researching this and it looks like the right way to fix the automatic overcharging of self-employment tax by Turbotax when it should not be charged if you're in a country with a "Totalization" agreement. 

  It seems to me the only the way to correct it is:

Go to Forms view in Turbotax, open "Sch SE-T" and set (Edit->Override) line 12, "Self-employment tax. Add lines 10 and 11. Enter here and on Schedule 2 (Form 1040) line 4." to zero (and Sched. SE-T also drops away from the final printout).  That 0 gets carried over to Schedule 2 and then on Sched 2 line 4 you have to handwrite on the printout, "Exempt, see attached statement" and attach some kind of "certificate" from the country you're in about paying social security there.  The certificate part seems _very_ nebulous to me and when I asked in my country the only thing they could provide was a printout of my payments for the past year, not really an official statement of coverage, but proof in some sense.  They didn't seem to have any experience providing such a proof before.

But, like I say, I could be totally wrong.  I just found no other/better answer.

Here are some references on the topic which seem to indicate the above approach:

https://www.ssa.gov/international/Agreement_Pamphlets/switzrld.html#elim_self

https://www.myexpattaxes.com/expat-tax-tips/self-employment/self-employment-taxes-for-americans-abro...

https://www.myexpattaxes.com/expat-tax-tips/featured/21-things-to-know-about-us-expat-taxes-in-2021

https://www.hrblock.com/expat-tax-preparation/resource-center/income/foreign/social-security-self-em...

https://www.cpasforexpats.com/post/self-employment-as-a-us-expat

https://www.artiopartners.com/blog/social-security-benefits-living-abroad

https://expatfile.tax/foreign-earned-income-exclusion

https://www.greenbacktaxservices.com/blog/us-switzerland-totalization-agreement-overview-for-expats

https://www.irs.gov/instructions/i1040sse

https://www.irs.gov/individuals/international-taxpayers/self-employment-tax-for-businesses-abroad

https://citizenshiptaxation.wordpress.com/2016/07/24/chapter-10-paying-into-social-security-american...

Turbotax really drops the ball here again for people living abroad and does not handle this simple and common expat situation--it should know of the totalization agreement countries and just do it automatically, maybe asking a few questions if need be.  Or is that asking too much?