They want to tax me on foreign self-employment!

Hi all,

Despite the two-month extension, I have started on our U.S. taxes, figuring I'd work on a bit at a time... and have run into a problem.

When I plugged in the numbers for my extremely modest self-employment income, Schedule SE popped out with a self-employment tax figure of $134.00. Now, since all of our income for 2008 is unquestionably excludable, I figured there would be some means of writing it off elsewhere on the 1040. The thing is, I haven't found one!

Self-employment tax shows up independently of the foreign income exclusion and after any credits I can subtract--there is no way of carrying forward a negative number, because the line immediately before self-employment tax says, "If line 55 is more than line 46, enter -0-." I've looked through all the information I can find in the instructions and on the IRS website, and had a search through past UK-Y posts, and don't see this situation addressed.

Am I right in thinking this is ridiculous? I feel I must have overlooked something obvious.

If nothing else, I'll claim it back in the UK self-assessment, but it just doesn't seem like that should be necessary when the income is actually excluded anyway. I would be annoyed to have to wait an entire calendar year to get back part of this unreasonable charge (thanks to the difference in tax years). I do pay the National Insurance here, after all!

Thanks.

I'm bumping this because I'm interested as well.

I had a look at IRS Publication 54, specifically the section on the  Foreign Earned Income Exclusion. On page 16, it  says that some of the income from a sole proprietorship,  or coroporation partnership may count as earned income. (Sorry, I can't cut and paste from the pdf document.)

I'm also curious about how to go about this, as form 1040 doesn't allow you to deduct the amount of earned income from self-employment, as per Jeremy I's post. It works out the same way in the paper version of the 1040, so it's not a computer issue.

I do pay the National Insurance here, after all!

If you pay National Insurance, you are not also expected to pay US SS.  You should include a statement with the tax return stating you have paid UK social security on the self employment earnings.

If you are using a tax software that doesn't allow you to zero out the US SE tax,  you may have to do by hand leaving the SE bit blank.

And just to be clear, the US SE tax is not excluded because of anything to do with the foreign earned income exclusion (which pertains to INCOME tax).  You don't pay US SE tax because you have already paid the equivalent in the UK.

If you are using a tax software that doesn't allow you to zero out the US SE tax,  you may have to do by hand leaving the SE bit blank.

It has nothing to do with the software. I do my taxes on paper, and the calculation is the same. Any negative amount you would have got from the foreign earned income exclusion is changed to 0 before you add the SE tax, so the SE tax is always positive.

And just to be clear, the US SE tax is not excluded because of anything to do with the foreign earned income exclusion (which pertains to INCOME tax).

But Pub 54 (Tax Guides for US Citizens and Resident Aliens  Abroad). specifically says that some self-employment income may possibly be considered earned income and therefore subject to the foreign earned income inclusion. It is on page 16 of pub 54.

It would take too long for me to copy the whole thing, but as an example, one sentence says: "If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income"

You don't pay US SE tax because you have already paid the equivalent in the UK.

Which means taking the foreign tax credit which is what Jeremy said he would be doing.

I'm still confused. Are you supposed to put any of the profit from self-employment that would be considered earned income (based on the calculations on page 16) under wages and tips, particularly if you're not taking a salary.  That seems to be the only way you would be able to deduct the foreign earned income exclusion.

It has nothing to do with the software. I do my taxes on paper, and the calculation is the same. Any negative amount you would have got from the foreign earned income exclusion is changed to 0 before you add the SE tax, so the SE tax is always positive.

You don't calculate the SE tax at all, if you have paid UK SS.  So if you are doing it on paper, you leave that line blank and do not include the Sch SE.  If you are doing it in a software program, you may not have the option to leave off the Sch SE so you might have to switch to preparing by hand.

But Pub 54 (Tax Guides for US Citizens and Resident Aliens  Abroad). specifically says that some self-employment income may possibly be considered earned income and therefore subject to the foreign earned income inclusion. It is on page 16 of pub 54.

You are confusing two concepts.  Income tax and SS tax.  For income tax purposes, SE income is indeed considered earned income in some circumstances and subject to the exclusion.  But the query has to do with SS tax and thus the exclusion is irrelevant in this discussion.

It would take too long for me to copy the whole thing, but as an example, one sentence says: "If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income"
Which means taking the foreign tax credit which is what Jeremy said he would be doing.

Again, you are confusing income tax with SS tax.  The FTC is for income tax purposes, not to apply against SE tax (which is SS).  To reflect that you don't need to pay SE tax in this instance, you simply do not calculate it and include a statement that says you are not calculated it because you have already paid UK SS.

I'm still confused. Are you supposed to put any of the profit from self-employment that would be considered earned income (based on the calculations on page 16) under wages and tips, particularly if you're not taking a salary.  That seems to be the only way you would be able to deduct the foreign earned income exclusion.

And again, you have to keep the idea of income tax separate from SS.  Yes, you include the self employment earnings (typically shown on Sch C) and apply either the exclusion or FTCs to reduce INCOME tax.  The questions specifically asked about SE tax which is SS, not income tax.  The exclusion and FTCs have nothing to do with SE tax, nor does SE tax have any bearing on what self employment income you report.

Clearer?

Jermyl

The SSA state in their explanation of the totalisation agreement that you MUST attach a certificate of coverage to your US return See:http://www.ssa.gov/international/Agreement_Pamphlets/uk.html
. Look at section III.B. of the pamphlet. which states " self-employed person must attach a photocopy of the certificate to his or her income tax return each year as proof of the U.S. exemption."


Therefore you should obtain and attach a certificate of coverage to your US return.

However IN YOUR CASE $134 is a VERY CHEAP way to buy 4 quarters of social security coverage in the US so you may choose to pay this (and no it is not a creditable tax in the UK, sorry!).

Practically speaking, the exemption exists whether a CoC is attached. The OP is not going to get a CoC before they intend to file their return and an extension would be overkill just to wait for a CoC.

ETA; typo

Sorry, I sort of got caught up in other things over the past few months and didn't ever think to come checking this thread.

In fact, I forgot about actually filing the taxes, too, until the real deadline loomed. I sent it off on 13 June. When I was doing the final calculations, I did get to the bottom of what was happening and sent my request for a certificate of coverage at the same time.

Also seeing no reason to request an extension, I paid the amount due and figured I would amend and claim a refund when the certificate came through.

However IN YOUR CASE $134 is a VERY CHEAP way to buy 4 quarters of social security coverage in the US so you may choose to pay this (and no it is not a creditable tax in the UK, sorry!).

That's an interesting idea, though, guya. I'll have to see what Elynor thinks. When I'm old and grey and the time comes to set up a pension (somewhere), would the two agencies figure this out and penalize me for claiming the same period and the same work twice?

Good thing I didn't wait, too, because I would definitely have underestimated how long it took to get the thing out the door. I tracked down a phone number for the HMRC office that processes these, after well over a month had passed. They told me they had received my request, but a response would be another few weeks because they dealt with things in strict order of receipt and were still processing correspondence from May. 

You are confusing two concepts.  Income tax and SS tax.  For income tax purposes, SE income is indeed considered earned income in some circumstances and subject to the exclusion.  But the query has to do with SS tax and thus the exclusion is irrelevant in this discussion.

Be fair, though; this is yet another case where (shall we say?) the IRS has an "opportunity" to make things a bit clearer for the average self-filing taxpayer. It would save a lot of hair-pulling for situations like ours if they ANYWHERE on the SE form or instructions said anything of this sort:

Self-employment tax is your Social Security contribution. Because you are self-employed, you have to pay both the employer and the employee portions. That's what all of this nonsense about a $400 threshold and multiplying the same number by two percentages in a row is all about. You get to claim half of this amount back out of your adjusted gross income because, if you were a normal person, the employer portion would never have been counted as part of your income. This tax is not subject to the foreign earned income exclusion; see XXXXX for more details on how foreign self-employment is treated. Etc. ...

Instead they just call it "self-employment tax" and leave you to deal with it! 

Does this certificate of coverage also cover for the medicare part of the self-employment tax? Social security is the vast majority of self-employment tax, but what about the 2.9% that goes towards medicare? I don't want to have to pay that AND national insurance...  

Edited: question answered (here at least)
No, the certificate apparently covers exemption from paying for medicare as well. Thank God, I would have been pissed off otherwise!

http://www.getirshelp.com/when-is-the-self-employed-exempt-from-social-security-and-medicare-taxes.htm

Social security is the vast majority of self-employment tax, but what about the 2.9% that goes towards medicare?

Maybe it's just lumped into the U.S.-U.K. agreement because in the U.K. all basic healthcare coverage is state-funded? Getting well above my head now...