It is required to be paid even though you are allowed to use the income for your foreign earned income exclusion. Self-employment income: A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce your regular income tax but will not reduce your self-employment tax. Foreign Income Exclusion

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Why do I pay employment tax for my self-employment income if all of my income was outside of the US and all of my income is noted as foreign earned income inclusion

Forum|Forum|2 years ago
March 9, 2024
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Best answer by pk12_2

@ph0429 , since you plan to "probably" retire in the UK , contributing to UK national health etc. and UK/US having a totalization agreement in place, you can avoid paying the SECA at 15.3% on your net income, by including in your US filing a UK certificate of participation to the IRS. Please see page from IRS:

www.irs.gov and search for Totalization agreement

"Covered by foreign country only. If the employee is an alien who wishes to claim an exemption from U.S. Social Security taxes and Medicare taxes because of a Totalization Agreement he/she must secure a Certificate of Coverage from the social security agency of his home country and present such Certificate of Coverage to his employer in the United States, according to the procedures set forth in Revenue Procedures 80-56, 84-54, and Revenue Ruling 92-9. An alternate procedure is provided in these revenue procedures for an alien who is unable to secure a Certificate of Coverage from his home country.

If the employee is a U.S. citizen or U.S. resident alien and they are working in a foreign country with which the United States has a Totalization Agreement, and under the Totalization Agreement, pay is exempt from U.S. Social Security tax, the employee or employer should get a statement from the authorized official or agency of the foreign country verifying that the wages are subject to social security coverage in that country.

If the authorities of the foreign country will not issue such a statement, either the employee or the employer should get a statement from the U.S. Social Security Administration, Office of International Programs. The statement should indicate that the wages are not covered by the U.S. Social Security."

This statement should be kept by the employer because it establishes that this employee’s pay is exempt from U.S. Social Security tax.

Only wages paid on or after the effective date of the Totalization Agreement can be exempt from U.S. Social Security tax".

Hope this answers your query. If it does then please "accept" the answered so the thread gets closed.

Is there more I can do for you?

pk

D

DianeW777

It is required to be paid even though you are allowed to use the income for your foreign earned income exclusion.

Self-employment income: A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce your regular income tax but will not reduce your self-employment tax.
Foreign Income Exclusion

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pk12_2

Employee

@ph0429 , agreeing with my colleague @DianeW777 , whether you are living in the USA or abroad, the self-employment income is treated exactly the same i.e. you owe federal and State tax on your net income from your sole-proprietor or other self-employment income,

You also have the FICA taxes ( Social Security & Medicare taxes ) --- shared equally between employer and employee in case of employed and 100% in case of self-employed ( called SECA for self-employed ). Note that this has nothing to do with Foreign Earned Income Exclusion ( which i s for the sole purpose of mitigating the impact of double taxation when both US and the foreign country tax the same income.

If the country where you are now earning self-employed income has a totalization agreement with the USA, then you have a choice of paying the Social Security taxes to either the foreign country or to the USA , depending on your longer term plans and current facts and circumstances.

If you need more on this aspect, please con sider providing more details as to where is your tax home, your citizenship etc.

pk

P

ph0429Author

Thanks @DianeW777!

Thanks @pk12_2! To answer your question, I am a US citizen and I am living and working in the UK. I intend to stay in the UK for the foreseeable future. Although I have a worked in the US before as an employee with an existing IRA, I do not plan to continue contributing to my IRA anymore as I plan to continue contributing to a UK pension plan.

Does that clarify?

P

pk12_2Answer

Employee

@ph0429 , since you plan to "probably" retire in the UK , contributing to UK national health etc. and UK/US having a totalization agreement in place, you can avoid paying the SECA at 15.3% on your net income, by including in your US filing a UK certificate of participation to the IRS. Please see page from IRS:

www.irs.gov and search for Totalization agreement

"Covered by foreign country only. If the employee is an alien who wishes to claim an exemption from U.S. Social Security taxes and Medicare taxes because of a Totalization Agreement he/she must secure a Certificate of Coverage from the social security agency of his home country and present such Certificate of Coverage to his employer in the United States, according to the procedures set forth in Revenue Procedures 80-56, 84-54, and Revenue Ruling 92-9. An alternate procedure is provided in these revenue procedures for an alien who is unable to secure a Certificate of Coverage from his home country.

If the employee is a U.S. citizen or U.S. resident alien and they are working in a foreign country with which the United States has a Totalization Agreement, and under the Totalization Agreement, pay is exempt from U.S. Social Security tax, the employee or employer should get a statement from the authorized official or agency of the foreign country verifying that the wages are subject to social security coverage in that country.

If the authorities of the foreign country will not issue such a statement, either the employee or the employer should get a statement from the U.S. Social Security Administration, Office of International Programs. The statement should indicate that the wages are not covered by the U.S. Social Security."

This statement should be kept by the employer because it establishes that this employee’s pay is exempt from U.S. Social Security tax.

Only wages paid on or after the effective date of the Totalization Agreement can be exempt from U.S. Social Security tax".

Hope this answers your query. If it does then please "accept" the answered so the thread gets closed.

Is there more I can do for you?

pk