Self Employed — Question About Totalization Agreement

Hi all,

We filed regular 2019 US taxes as we hadn't been present in the UK long enough in 2019 to claim residence. This year, however, we're filing US taxes as self-employed people in the UK for the first time. I know we each need to get a certificate of coverage from the Inland Revenue National Insurance
Contributions Office, but I have a couple of questions about actually filing the forms:

1) Do we still claim the foreign earned income exclusion?
2) Is there somewhere in TaxAct to include the totalization agreement?
3) Should I be using TaxAct for self-employment income at all, or should I use something marginally more sophisticated like H&R Block or something?

I've tried inputting data into TaxAct but have made a complete mess of it! Help! Anyone have any advice? I know we don't owe self employment taxes in two countries because of the totalization agreement, but I have zero clue how to actually file properly at this stage.

Assuming that the engagements you have are classified as self-employment under the laws of the nation(s) where the work is performed, you'd file Schedule C plus Forms 1116 & 8858. A certificate of coverage issued by HMRC would be attached to the return.  Hopefully the UK tax was paid to HMRC by 31 December 2020 so that there are adequate foreign tax credits to claim. Electing to claim the foreign earned income exclusion may not produce the optimum result.

I am not familiar with Tax Act. Does it prepare Form 8858?

Hiya Guya, 

Yes, we’re definitely self employed. Hubby’s an artist and I’m a writer. We didn’t have any self-employment income to report in the 2019/2020 tax year, so we’ll actually file our first U.K. self-assessment this April. As I understand it, the tax bill for that first year plus half the next (the bumper first bill) will be due on January 31st, 2022. So, no taxes paid to the U.K. as yet, though we lived here all year in 2020.

Are you saying that we’ll need to file on paper, then? It’s beginning to sound like we’ll need to submit a statement and a certificate with the tax return?

Hiya Guya, 

Yes, we’re definitely self employed. Hubby’s an artist and I’m a writer. We didn’t have any self-employment income to report in the 2019/2020 tax year, so we’ll actually file our first U.K. self-assessment this April. As I understand it, the tax bill for that first year plus half the next (the bumper first bill) will be due on January 31st, 2022. So, no taxes paid to the U.K. as yet, though we lived here all year in 2020.

Are you saying that we’ll need to file on paper, then? It’s beginning to sound like we’ll need to submit a statement and a certificate with the tax return?

It is not helpful to pay UK tax as late as 31 January. The US gives credit for foreign tax paid during a US tax year. Standard planning is to pay HMRC by 31 December each year. Some tax software used by some professionals supports all the forms. Certainly not all software.  Consumer based software will not  include all the forms required. The US return is due to be filed by 15 June 2021 but can easily be extended until 15 December 2021 so there is plenty of time to get things accurate.

It is not helpful to pay UK tax as late as 31 January. The US gives credit for foreign tax paid during a US tax year. Standard planning is to pay HMRC by 31 December each year. Some tax software used by some professionals supports all the forms. Certainly not all software.  Consumer based software will not  include all the forms required. The US return is due to be filed by 15 June 2021 but can easily be extended until 15 December 2021 so there is plenty of time to get things accurate.

Agreed — I think we'll plan to pay as soon as we can after filing the UK tax return. Then we'll have plenty of time to accrue the next payment on account.

As far as I've read, the US gives credit for taxes paid *or* accrued during a tax year, so this shouldn't preclude us from being exempt in Social Security terms. It's just really hard to find information about exactly *how* to knock off the self-employment tax, which is non-payable SS and Medicare tax under the totalization agreement. It doesn't look like TaxAct is set up to handle that scenario very well, which is unfortunate because I've used TaxAct for probably 15 years! Oh well.

I wonder if H&R Block Expat self-service is a good option for the US return? I might wander over and give that options a little whirl here...

Okay, I went for MyExpatTaxes (well-rated on TrustPilot). First time not using TaxAct! Apparently I'll probably need to mail a paper return, but that's just fine with me. I don't know why there isn't more written on the net about this scenario? Surely there must be a large number of people in this position?!