Q&A: I’m self-employed and confused– what do I need to do about US Self-Employment taxes if I have already paid into a foreign system?

Posted by Don W on May 13, 2010 under Business Tax Issues, Expatriate Taxes

Q: I have been in Finland for 12 years, and I am returning the the United States and filing previous year’s taxes. I am confused by the apparently contradictory information that I find in the the 2009 IRS publication 54, page 11, titled “Exemption from Social Security and Medicare Taxes”.

I paid all my self employment taxes in Finland dutifully all the years I lived there, and understand the Totalization Agreement with Finland means I don’t have to pay them again in the US, but my accountant says I have to pay the 15.3% Self-Employment tax.

Who is correct?

A: The basic rule is this – you must be paying into one system or the other (assuming there is a Totalization Agreement).

In your case, if you have been paying into Finland’s social system then you would not be required to pay Self-Employment tax on the income.  You would just be required to pay income tax.

Please check out the SocialSecurity.gov overview of the Totalization Agreements by country (you can also find full text of the Agreements on the site).  Keep in mind that these agreements only apply to the years spent abroad.  Once you return to the US you will again be responsible to US system.

Q&A: I’m a partner in two offshore companies — how do I file?

Posted by Don W on under Business Tax Issues

Q: Hello, I am a U.S. citizen living in Europe and I am a partner in 2 separate companies here, with 50% in one and between 30% and 50% in the other. I am very confused and have several questions.

  1. As I live full time abroad, I get a 2-month extension for filing until June 15th, correct?
  2. What forms do I need to include with my 1040? As I understand it, I need the 2555 and the 5471?
  3. As I am a partner and receive distribution of earnings rather than a salary, this does not qualify as foreign earned income so I cannot elect the foreign earned income exclusion, correct? So would I still need the 2555 form?
  4. Income taxes and SS are taken from my earnings here. Do I qualify for US tax credit?

A: I will answer your questions in the order you presented them.

  1. Yes, you an get automatic extension until June 15th.
  2. From what you have presented you will need at the very least Form 2555, Form 1116 and
  3. If you are receiving distributions — and NOT dividends — for work done then yes, it does qualify as Earned Income.  Additional details about your situation would help us to provide a more specific answer.
  4. Income taxes and Social Security are two different issues.  If you paid income tax you probably qualify for the Foreign Tax Credit (see number 1).  Social Security is governed by whether or not there is a Totalization Agreement with the country in which you are residing.  If there is, then, generally, you are only required to pay into one system.  But you must pay into one or the other.

Q&A: I don’t think I’m actually an expat. Do I need to file?

Posted by Don W on under Expatriate Taxes, First Time Filing as an Expat

Q: Hi, I’m American but I live in the Netherlands and am married to a Dutch citizen.  I am not an expat, as I’m on a highly skilled migrant visa and I work for a Dutch company, earning euros. I’ve been told that I need to file a tax return in the US– can you advise?

A: Because you are a US citizen living and working abroad, you are an expat.  Let me qualify that – by our definition you are an expat!

All US citizens are required to report their worldwide income each year.  You do have to file.

Based on what your question it looks like you will have to file Married Filing Separate instead of Married Filing Joint.  If your husband is a non-resident alien with no exposure to the US then you must file MFS.

There’s good news, though:  the IRS provides two tools to help reduce, or eliminate, double taxation.  The first is the Foreign Earned Income Exclusion, which if you qualify, allows you to exclude up to $91,500 for the 2010 tax year.  The second tool is the Foreign Tax Credit.  This, potentially, gives you a dollar-for-dollar credit against your US taxes for taxes paid to foreign country.

It is more complex than that and various factors can determine the outcome.  But, that is the gist of it.

Our web site has a great deal of information about expat filing requirements on our Expat Tax Basics page.

Q&A: I’ll be working in another country but paid by my company in the US– what do I need to know?

Posted by Don W on under Expatriate Taxes, Relocation and Taxes

Q: I would like some information regarding expatriate tax as related to my somewhat unique situation. My company is planning to send me to the Dominican Republic to work with our offshore partners. Here are the specifics of my situation:

  • I will be working in the Dominican Republic for 1-3 years
  • I will be paid by my company in the US
  • My company has not incorporated in the Dominican Republic
  • I will simply be working with companies in the DR but will be working for and getting paid by my company in the US.
  • I plan to travel to the US at least twice each year, probably around Christmas and the 4th of July.
  • What are my options? Thanks again in advance for any information you can provide.

The MOST important thing to remember is whether or not you will qualify for the Foreign Earned Income Exclusion. That is where the 330 day rule comes from.

All the time you return for meetings, vacation, medical emergencies, etc. count against it.  Are you going to be paying taxes in the Dominican Republic? If so, you will also be eligible for the Foreign Tax Credit.

You can also find a great deal of information on our Expat Tax Basics page on our main site.