# How to correctly do foreign income exclusion



## ambush276 (Feb 2, 2019)

So i have an interesting one here. I am about to work for a company outside the US and be outside the US for at least 330 days a year. With this company i will be traveling a lot and will be outside the home country of the company for over 180 days making me (according to their rules) not a resident. I understand if i am outside the US for 330 days a year i should qualify for the foreign income exclusion clause. 

The part that i am a little confused about is the notion of being 'self employed' vs. having an employment contract. I will have a contract with the company for a3 year long commitment from them, guaranteeing employment and salary. I am not a director or an officer of that company. My question is, what constitutes self employment as an expat vs being "employed." I will be getting a monthly paycheck from this company even though i will most likely not be a resident of that country (at least for the first year). Can anyone provide clarity on this ? 

The question boils down to will i have to pay self employment tax or will i be exempt from that. (Let's not get into state taxes right now  )


----------



## Bevdeforges (Nov 16, 2007)

> The part that i am a little confused about is the notion of being 'self employed' vs. having an employment contract.


The terminology can get a little confusing here - but basically, what you need to ask yourself is whether you are going to be working as a "contractor" for them or if you are actually an "employee." 



> I will be getting a monthly paycheck from this company even though i will most likely not be a resident of that country (at least for the first year).


Whether or not you will be resident in the country where your employer is located is more or less irrelevant. A couple key questions are the degree to which you will be working under the direction of the employer (as a contractor or self-employed person, you'd have the freedom to determine your own work hours and methods, to take on additional customers/clients, etc.), and whether or not you will be paying into the social insurance or tax systems outside the US (in your country of residence).

The easiest situation (for you) is if you will be contributing to the social insurance system in a country with which the US has a "social security treaty" - because in that case, you are definitely employed and shouldn't have to pay "self-employment tax" (i.e. US Social Security). You may want to ask your employer what your status will be with respect to the social insurance system - will they be withholding your pay for health cover, retirement system, other benefits, or do they expect you to manage that (plus taxes) yourself?


----------



## Moulard (Feb 3, 2017)

> The part that i am a little confused about is the notion of being 'self employed' vs. having an employment contract.


Fundamentally the difference between being an employee and a self employed contractor boils down to a question of control. Its quite possible that your contract says that you are a "contractor" but the nature of control means that you are in the eyes of the IRS at least a prima facie employee. 

Given the terms of your contract: do you use your own tools; can you make a loss on the work you are performing; can you sub-contract the work out; are you free to complete the work as you see fit, without direction from the company? If the answer to these sorts of questions is yes, then you are more likely to be seen as a contractor in the eyes of the IRS.

These things can be complicated, particularly when there is a third party in the mix... ie your contract is with company A, to provide services to company B. e.g. labour hire arrangements and consulting type practices.

In the past the IRS used a 20 question test to held determine the nature of the relationship. But that has been simplified down to three broad questions of control.

https://www.irs.gov/taxtopics/tc762


----------



## ambush276 (Feb 2, 2019)

that is fantastic information. 

so according to 

the irs tax link in the previous post ...

it seems that it's very ambiguous and that the IRS can kind of make the determination as they see fit.

I need to make sure my contract states things like I can't incur a loss, (it already states i'm paid weekly at X amount), i'm using their equipment, etc etc...

Those things need to specifically be in the work contract. Either way though, the IRS can have it's own judgement when it's time to file.

When i file for my taxes, would i need to file something separate showing that i am an employee instead of a contractor. I am assuming that a foreign company is not going to give me a "W2" or a "1099". So what things will i have to file (for taxable year 2019) to show the income exclusion?

Thanks!


----------



## ambush276 (Feb 2, 2019)

futhermore, do i just declare i am an employee and if the IRS audits me and they want to change that method i just pay a penalty? Or do they determine this for me at the time of filling?


----------



## Bevdeforges (Nov 16, 2007)

OK, I think you're getting a little wrapped up in the details. You're entitled to the FEIE as long as you are earning income (whether as an employee or a contractor) and remaining outside the US for at least 330 days in a period of 12 consecutive months. How you report your income is exactly the same as long as it's under the FEIE limit (somewhere north of $100K these days).

The "self-employment tax" is a different issue - and where the distinction between employee and contractor may come into play. Generally speaking, if you are set up as a freelancer in another country and thus are paying into that country's "social security system" (means different things in different countries) AND that country has a social security treaty with the US, then you don't pay "self-employment tax" to the US. There are far fewer countries, though, with social security treaties with the US than with tax treaties. The US can ask you to get certification with the social security system in your residence country to justify your exempting out of paying self-employment tax. (And actually, you're supposed to have such a certification if you claim you are not required to pay the tax, though almost any proof of your payment of "social insurances" in another country should cover you.)


----------



## ambush276 (Feb 2, 2019)

the issue with that is that the company i am working for is going to have me travel a lot in the first year. Enough where i will not even be a tax resident in that country for that year. According to their rules, and i checked with a local accountant, i will be exempt from paying the social security tax in that country or have anything witheld to that regard. I will still be, according to him, on an employment contract as any other employee would of the company. So, from your information if i am not paying social security tax in one country i still have to pay it in the US? I am not self employed by any stretch of the imagination, but i just want to make sure i am paying as i should (and of course not overpay).


----------



## Bevdeforges (Nov 16, 2007)

I guess the question is: what country is your employer paying you from? If that country has a social security treaty with the US, I'd just file as an employee and not worry about any sort of "self-employment tax" for the US. If they don't have a social security treaty, I'd still just file like an employee and see what happens. (As long as your employer is not going to submit a W-2 or a 1099 to the IRS, there is no way they'll know how much you're being paid or what sort of withholdings you have.)


----------

