# Self-employed and 2555 Foreign Earned Income Exclusion



## Casumb (11 mo ago)

I am a naturalized US citizen who has lived in Thailand (my birthplace) and has been freelancing for 9 years. I've been filing US taxes all those years, using schedule C and all that. Of course, I have to pay taxes every year.

When I file my US taxes, I never say that I also pay local taxes, because I just want to keep two countries separate. Likewise, when file the local taxes, I never mention the US taxes or my SSN either; I simply file as a regular Thai citizen. So, basically, I pay taxes to both countries. (Sounds stupid now, but I just want to be in a complicated situation; just keep two countries separate.)

I heard about Foreign Earned Income Exclusion a couple of years ago, and I tried this option but TaxAct just said I was not qualified. I have NEVER been present in the US for even one second in the past 9 years, and I am COMPLETELY based in Thailand (365 days/year), with a local foreign address on the IRS file. I tried to so some research and I guess it was because self-employed persons are not qualified for this? The Foreign Earned Income Exclusion will ask, who is your employer? what's their address? Which I don't have because I am self-employed. (I guess because I don't have an employer to pay for my SS and Medicare taxes, so I have to pay them myself and therefore cannot do FEIE thing.)

Questions:
1. So, now, I want to know if my understanding has been correct. If you are self-employed, you *cannot* claim the Foreign Earned Income Exclusion? You have to pay taxes as if you were a self-employed person in the US?

2. If I can, so instead of putting my "income" under "self-employment" (as I usually do every year), do I just have to do it under "2555 FEIE" and leave the self-employment blank? (I am confused.)

3. Is there any free tax programs (such as TaxAct) that would allow me fill out the FEIE?

Thank you so much. I know I have been tax ignorant -- I am now trying to educate myself. I have a lot by reading forum. Thank you all the admins and those who share and ask.


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## Bevdeforges (Nov 16, 2007)

Casumb said:


> 1. So, now, I want to know if my understanding has been correct. If you are self-employed, you *cannot* claim the Foreign Earned Income Exclusion? You have to pay taxes as if you were a self-employed person in the US?
> 
> 2. If I can, so instead of putting my "income" under "self-employment" (as I usually do every year), do I just have to do it under "2555 FEIE" and leave the self-employment blank? (I am confused.)
> 
> 3. Is there any free tax programs (such as TaxAct) that would allow me fill out the FEIE?


 1. This is incorrect. If you are self-employed, there is some disagreement (or has been here on the Expat Forums) as to whether the limits to the FEIE apply to your gross revenues (i.e. before you deduct your expenses) or to your net income from your business. But there is no problem with listing yourself as your "employer" and your home address as employer's address (assuming you work from home - if you have a business address, use that). You don't have an EIN (Employer Identification Number) because your business is a non-US one. 

2. My advice would be to just swami up your regular income statement and take the net result ("net income") as your salary and put it on the line for salary and wages. If you leave the self-employment thing blank, you don't need to submit the Schedule C.

3. With any tax program you have to sometimes do whatever is necessary to make your information fit what they are asking for. Things have changed in recent years, but when I was filing to take the FEIE you had to create a FEC ("foreign employer certificate" or something like that) which was a sort of ersatz W2 for those who were overseas and so didn't have a W2. But it works for getting the numbers onto the forms just fine. If you're concerned about filing, you want to consider that not reporting something significant is more of a problem than possibly reporting it in the wrong space or on the wrong line. Chances are it won't make any difference in what you owe in the end.


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## Casumb (11 mo ago)

Bevdeforges said:


> 1. This is incorrect. If you are self-employed, there is some disagreement (or has been here on the Expat Forums) as to whether the limits to the FEIE apply to your gross revenues (i.e. before you deduct your expenses) or to your net income from your business. But there is no problem with listing yourself as your "employer" and your home address as employer's address (assuming you work from home - if you have a business address, use that). You don't have an EIN (Employer Identification Number) because your business is a non-US one.
> 
> 2. My advice would be to just swami up your regular income statement and take the net result ("net income") as your salary and put it on the line for salary and wages. If you leave the self-employment thing blank, you don't need to submit the Schedule C.
> 
> 3. With any tax program you have to sometimes do whatever is necessary to make your information fit what they are asking for. Things have changed in recent years, but when I was filing to take the FEIE you had to create a FEC ("foreign employer certificate" or something like that) which was a sort of ersatz W2 for those who were overseas and so didn't have a W2. But it works for getting the numbers onto the forms just fine. If you're concerned about filing, you want to consider that not reporting something significant is more of a problem than possibly reporting it in the wrong space or on the wrong line. Chances are it won't make any difference in what you owe in the end.


Thank you, Bev.

What does it mean by this "The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax"?

Let's say my self-employment (SE) income: 30,000
Expenses: 5,000
Assuming that there was no other income.
I live in Thailand where there is no Totalization Agreements.

And I choose to do these:
1. I first file my SE income, using schedule C.
2. Then, I do FEIE on a separate page.

Then, in this case,
Is there a possibility that I won't owe the IRS anything? (tax owed = 0)

OR, no matter what, I still have to pay because "the excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax." I mean no matter I still have to pay the IRS something because my self-employment tax needs to be paid.

--------------
I am confused because I read on a website that:

*The only way to avoid US social security tax for expats who don’t live in one of these countries with Totalization Agreements ---which is my case--- is to establish a foreign corporation and arrange to be paid as an employee of the new corporation. While this can definitely benefit some Americans abroad, establishing a corporation comes with other US reporting and tax obligations, so a detailed analysis of the costs and benefits should be made in each case.*

I don't live in a country that has the agreement, and I don't want to establish a foreign corporation either.

Thank you.


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## Bevdeforges (Nov 16, 2007)

Self-employment tax is (as you may already know) is 15.3% - basically you are paying both the employer and employee portions of "social security tax." And what that does is to keep you in the US social security system (basically just pension plus Medicare). All that stuff means is that "self-employment tax" (or if you prefer, social security tax) is completely separate from your personal income taxes.They simply collect them on the same return if you are self-employed.

If there is no totalization agreement with the US where you are currently residing, it's probably easier to just pay the self-employment tax and be done with it. Like the stuff you read on the website says, "*establishing a corporation comes with other US reporting and tax obligations" *and if you want to stick with the rules as they are written, the reporting and tax obligations that come with owning 10% or more of a foreign corporation are pretty oppressive - in terms of time required to fill out all the forms required if nothing else.

All my experience in this area is with countries where there is a totalization agreement, and frankly, in that case you decide how likely it is that you'll show up on the IRS radar, given their overloaded status and adjust what you report accordingly.


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## Casumb (11 mo ago)

Bevdeforges said:


> Self-employment tax is (as you may already know) is 15.3% - basically you are paying both the employer and employee portions of "social security tax." And what that does is to keep you in the US social security system (basically just pension plus Medicare). All that stuff means is that "self-employment tax" (or if you prefer, social security tax) is completely separate from your personal income taxes.They simply collect them on the same return if you are self-employed.
> 
> If there is no totalization agreement with the US where you are currently residing, it's probably easier to just pay the self-employment tax and be done with it. Like the stuff you read on the website says, "*establishing a corporation comes with other US reporting and tax obligations" *and if you want to stick with the rules as they are written, the reporting and tax obligations that come with owning 10% or more of a foreign corporation are pretty oppressive - in terms of time required to fill out all the forms required if nothing else.
> 
> All my experience in this area is with countries where there is a totalization agreement, and frankly, in that case you decide how likely it is that you'll show up on the IRS radar, given their overloaded status and adjust what you report accordingly.


It's clear, Bev. Thank you. It's sad that I cannot take the advantage of FEIE because it wouldn't make any difference on my obligations to pay my SE tax anyway. (That's one of the reasons why I am considering renouncing, too--having to pay taxes to the US (which is hefty) and where I live). Again, I really appreciate you taking the time to respond to my question.


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## Bevdeforges (Nov 16, 2007)

You shouldn't have to be paying double taxes. And I still think you can take advantage of the FEIE even if you wind up having to pay "self-employment" taxes. Check the IRS publication 54 for overseas taxpayers for a better explanation of the FEIE and whether (and how) it applies to self-employed individuals. About Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad | Internal Revenue Service


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## Casumb (11 mo ago)

Bevdeforges said:


> You shouldn't have to be paying double taxes. And I still think you can take advantage of the FEIE even if you wind up having to pay "self-employment" taxes. Check the IRS publication 54 for overseas taxpayers for a better explanation of the FEIE and whether (and how) it applies to self-employed individuals. About Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad | Internal Revenue Service


Thank you. I have read parts of it and will finish it.

By the way, as I was reading pub 54, I found this:

*Example.

You are in business abroad as a consultant and qualify for the foreign earned income exclusion. Your foreign earned income is $95,000, your business deductions total $27,000, and your net profit is $68,000. You must pay self-employment tax on your net profit of $68,000, even though you are qualified for the foreign earned income exclusion.*

My question is what difference does it make then if this person is qualified or not for the FEIE? FEIE does not seem to affect the net profit, and 68,000 is still the number used to calculate his/her SE tax? Does seem to make him pay less tax…


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## Bevdeforges (Nov 16, 2007)

Casumb said:


> My question is what difference does it make then if this person is qualified or not for the FEIE?


This is what I was talking about up thread. Self-employment tax is NOT an income tax. It's completely separate from your income taxes. So, it is entirely possible that you pay no income tax (because of the FEIE) but you have to pay self-employment tax on the income you excluded from tax based on the FEIE. That's all.


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## Moulard (Feb 3, 2017)

Bev has this well covered, but to try to explain it with Thai equivalents in the event it helps.

In Thai terms it is the difference between what is paid to the สำนักงานประกันสังคม for Social Security and what you would pay to the กรมสรรพากร for Income Tax

When you are self employed you pay both parts and IRS collects both income tax and social security taxes on behalf of the Dept of Social Security.

If there was a totalisation agreement in place between the US and Thailand then the FEIE would cover off the income tax part and you would be able to get a certificate of coverage to exempt you from SE taxes.

But as there is no totalisation agreement you are on the hook for the US SE taxes.


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## Casumb (11 mo ago)

Bevdeforges said:


> This is what I was talking about up thread. Self-employment tax is NOT an income tax. It's completely separate from your income taxes. So, it is entirely possible that you pay no income tax (because of the FEIE) but you have to pay self-employment tax on the income you excluded from tax based on the FEIE. That's all.


 Thank you. It is clear now.


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## Casumb (11 mo ago)

Moulard said:


> Bev has this well covered, but to try to explain it with Thai equivalents in the event it helps.
> 
> In Thai terms it is the difference between what is paid to the สำนักงานประกันสังคม for Social Security and what you would pay to the กรมสรรพากร for Income Tax
> 
> ...


Oh, clear. Thank you, Moulard.


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## Casumb (11 mo ago)

Another question if I may:

I tried FEIE, and it did not do anything. The amount owed remained unchanged. But when I did foreign home deduction, the number got lowered!

*Situation:* I live in my relative's house (so, it's not MY home), but I give her a certain amount every month to cover household expenses. I am a self-employed, working from home 100% and live/work here 365 days. I have my own room and space to do my work.

The questions are:
1. Am I eligible for foreign home deduction? (=for the amount I pay every month to my relative)
2. Can I also claim home office use deduction? (=since the home is not under my name, can I do it?)
3. When they ask when I established this home, did I just say 01 JAN 2021 - 31 JAN 2021, or since the first day I moved here 9 years ago in 2011?
4. When they ask about nationality (country you are a national of something like this under FEIE), do I just say that I am a dual citizen (Thai/US)?

Thank you. I am trying to learn all about this by myself, so sorry for asking too many questions.


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## Moulard (Feb 3, 2017)

1. If you are eligible to take the FEIE then you are able to use the foreign home deduction but in practice it is not terribly efficient. If it was having a material impact you are either paying your relative an awful lot in rent or you are not calculating the deduction correctly. Your housing expenses must exceed 16% of the FEIE limit to be deductable . So if you are paying your relative on the order of 57,000 Baht a year or more then you can deduct ...although it caps out at 30% of the FEIE limit.

2. Maybe. Maybe not. It will depend. First, you cannot double dip and claim a deduction twice for the same expense. Second there are specific rules related to home office expenses.But conceptually Form 8829 can be used to claim expenses for business use of your home and has to be filed with Schedule C if I recall correctly... but I think the area must be exclusively used for business use not a mix of personal and business use.. but I have to admit I am not really on top of the details on this.. Read up on Form 8829 and its instructions.

3.Which line are you referring to. Assuming you are filing as a bona fide resident, then the date your residence began would be in 2011 or later if you did not become a bonafide resident at the time or your arrival. For Home deductions I don't think they ask when you estabilished the home... unless I my memory is faulty -

4. It probably does not matter, these questions are there to validate your eligibility, and given the time you have been there it is probably of no consequence. But that said, how have you filed in previous years? I would suggest do the same.


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## Harry Moles (11 mo ago)

Honestly, either cease filing altogether or call it regular income and stop throwing money down the toilet paying SE tax...


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## Casumb (11 mo ago)

Moulard said:


> 1. If you are eligible to take the FEIE then you are able to use the foreign home deduction but in practice it is not terribly efficient. If it was having a material impact you are either paying your relative an awful lot in rent or you are not calculating the deduction correctly. Your housing expenses must exceed 16% of the FEIE limit to be deductable . So if you are paying your relative on the order of 57,000 Baht a year or more then you can deduct ...although it caps out at 30% of the FEIE limit.
> 
> 2. Maybe. Maybe not. It will depend. First, you cannot double dip and claim a deduction twice for the same expense. Second there are specific rules related to home office expenses.But conceptually Form 8829 can be used to claim expenses for business use of your home and has to be filed with Schedule C if I recall correctly... but I think the area must be exclusively used for business use not a mix of personal and business use.. but I have to admit I am not really on top of the details on this.. Read up on Form 8829 and its instructions.
> 
> ...


Thank you so much, Moulard.


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## Casumb (11 mo ago)

Harry Moles said:


> Honestly, either cease filing altogether or call it regular income and stop throwing money down the toilet paying SE tax...


I want to, but the thing is that in Thailand, the pension system is not that great. In my case, I would get less than 100 US dollars a month after I retire. That's why I try to keep the SS benefits, which I have been paying for 13 years (both while when I was in the US and out) and have earned enough credits to receive the benefits once I retire. So, a part of me is telling me that I should continue contributing, so it's getting bigger.

But now, looking forward, if I want to buy a house, own a land, invest in something, or perhaps inherit something, I would have to worry about the US tax. So, I am thinking it might be better to just give up my US citizenship and start investing on my retirement myself. Instead of paying SE tax to the US, I would just use that money to plan my own retirement savings in Thailand. Based on my initial research, once I renounce, I can still have my SS benefits deposited to my bank account without having to visit the US (since Thailand is one of the countries that SS would send their payments to), although 25.5% of the benefits would be deducted when paid to my future "non-resident." I feel that I would have more (financial) freedom and peace of mind that way, not having to deal with the IRS anymore ever.

Sorry to ramble--but I found this wonderful forum when I started thinking about renunciation, and it helps me a lot as I try to make the decision.

P.S. I have just learned that I'm supposed to pay estimated tax and make quarterly payments for my SE income, which I haven't done for a decade because I didn't know!, I feel much more inclined to just have nothing to do with IRS. It's just too much of a headache. In Thailand, I can just file my tax in just 15 minutes.

By the way, I welcome any thoughts or opinions on this. I know I may have overlooked some issues that could affect me in the long run. I try to get as much as information before making a final decision.


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## Harry Moles (11 mo ago)

You won't lose your SS benefits if you aren't filing (assuming of course you don't get into some sort of massive trouble with the US government, which is extremely unlikely).

If paying the SE tax means that you receive a larger SS benefit then that is potentially worth doing, but you need to run the numbers rather than make assumptions.

You should refer to the Thailand-US tax treaty to determine how you would be taxed on SS benefits received while living in Thailand, both as a US citizen and as an NRA (in the event that you renounce).


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## Casumb (11 mo ago)

Harry Moles said:


> You won't lose your SS benefits if you aren't filing (assuming of course you don't get into some sort of massive trouble with the US government, which is extremely unlikely).
> 
> If paying the SE tax means that you receive a larger SS benefit then that is potentially worth doing, but you need to run the numbers rather than make assumptions.
> 
> You should refer to the Thailand-US tax treaty to determine how you would be taxed on SS benefits received while living in Thailand, both as a US citizen and as an NRA (in the event that you renounce).


 Harry -- much appreciated. You are right--I will do those things. I certainly didn't think about these!


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## Harry Moles (11 mo ago)

I can understand people not knowing how this works and deciding to ignore it. That makes all kinds of sense. What I will never be able to wrap my head around is people not knowing how this works but who willingly send cheques to the US government. I personally would want to know exactly what was going on before I decided to hand over even one cent of my money.


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## Bevdeforges (Nov 16, 2007)

Harry Moles said:


> I can understand people not knowing how this works and deciding to ignore it. That makes all kinds of sense. What I will never be able to wrap my head around is people not knowing how this works but who willingly send cheques to the US government. I personally would want to know exactly what was going on before I decided to hand over even one cent of my money.


There are many and various reasons for hanging onto that "tie" ("chain"?) to the good ol' US of A - and I suppose that the certainty of a US SS pension in old age could be one of those reasons. If I read the OPs messages correctly, it sounds as if s/he is still building up credits toward a US SS pension benefit. Different strokes for different folks.


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## Harry Moles (11 mo ago)

Paying SE taxes to boost the SS benefit makes potential sense - but only if you've run the numbers and figured out the ROI.


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## Moulard (Feb 3, 2017)

Harry Moles said:


> Paying SE taxes to boost the SS benefit makes potential sense - but only if you've run the numbers and figured out the ROI.


It makes perfect sense particularly if one wants to retire to Thailand and stretch out what ever savings you have. 

The expectation in Thai culture (and much of the rest of Asia) is that ones children look after you in retirement.

The Thai aged pension is one of the lowest in the world starting at just 600 Baht a month (about $18 USD)

By way of comparison the minimum wage there ranges from about 300 to 325 Baht a day


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## Harry Moles (11 mo ago)

My question was rather what provides better ROI to fund retirement: paying SE tax to later collect SS, or not paying SE tax and investing that money?


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## Bevdeforges (Nov 16, 2007)

Harry Moles said:


> My question was rather what provides better ROI to fund retirement: paying SE tax to later collect SS, or not paying SE tax and investing that money?


It can depend on how and where you invest it. Talk to any number of folks who started their retirement just after the financial crisis of 2008 whose retirement funds were suddenly worth only half of what they had been.


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