# How much does tax filing change after Self Employment?



## Costa55 (Apr 13, 2016)

Hey Everyone, 

Right now my tax situation is pretty simple. Under thresholds for FEIE, Interest Gains, no Stocks, only term life insurance, no pension etc. But I'm trying to start a small business as additional income, mostly as a hobby, but I have to get a business license in my country so trying to keep my US side on the straight and narrow as well. 

From what I see online from the IRS, there is self-employment tax but it seems like SE Tax is your contribution to Social Security etc, I don't deal with SS with foreign earned income but now I have to with a sole proprietorship in a foreign country? 

I see there is a minuscule threshold of $400 net earnings annually that makes you exempt but that seems like a pointless threshold to have in 2017. 

I also see there are Bilateral Social Security Agreements since I pay a form of SS in my home country, but don't see my country listed. So I might have to pay x% at home and 15.3% SE Tax to the IRS? I understand I can get a letter from my home country in relation to taxes paid as well but that's not going to be easy either. 

Seems like a lot of work for a hobby business that doesn't classify as a hobby business in the IRS' books. https://www.irs.gov/help-resources/...ther-business/income-expenses/income-expenses 

Also looked at:
https://www.irs.gov/individuals/international-taxpayers/self-employment-tax-for-businesses-abroad

https://www.irs.gov/pub/irs-pdf/f1040sce.pdf
https://www.irs.gov/pub/irs-pdf/f1040sse.pdf
https://www.ssa.gov/international/agreement_descriptions.html
https://www.irs.gov/pub/irs-pdf/p334.pdf

Let me know what you think please.


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## Moulard (Feb 3, 2017)

You should be able to use either the foreign earned income exclusion and/or foreign tax credits to offset US income taxes, but you may find it difficult to avoid the US self employment tax without the presence of a totalisation agreement.

So in short unless there is something specific in your dual taxation treaty with the US I fear you will end up owning the US SE taxes.

You might be able to look into your local tax rules. You may be able to take a foreign tax credit or offset those US taxes depending on how your tax laws are written.


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## Bevdeforges (Nov 16, 2007)

One other approach might be to simply treat the "hobby business" as a second job and include the profits under your FEIE. Assuming that it isn't going to become your primary means of support (i.e. you're keeping your day job) you could just report the profits as a second salary. 

Granted, it's not the "by the book" treatment - but you are reporting the income and, as long as you're still enrolled in the local social security system, it's not out of keeping with the intent of the US law. At a distance, the IRS ability to check up on and control foreign income is limited, at best. In many instances like this, the important thing seems to be to disclose (so that they could come back to you with questions if they have any) but to treat it as simply as possible.
Cheers,
Bev


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## Costa55 (Apr 13, 2016)

Thanks very much for the responses thus far. I took a look at some of the hobby vs business stipulations, and since I am forced to get a business license and account for business activities in my home country I think it will be hard to classify it as a hobby. 

If things take a while to get off the ground I might not net the $400 this year, but hope to in 2018  

Just seems like a lot of work for a few extra $$, part of which will get swallowed up in local and US taxes, nearly counter-productive. 

Guess I'll have to be reading more of this as well: https://www.irs.gov/pub/irs-pdf/p334.pdf 

https://www.irs.gov/uac/business-or-hobby-answer-has-implications-for-deductions


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## Moulard (Feb 3, 2017)

Another alternative you might consider is to work through a contract management company. They handle your invoicing for you, deal with professional indemnity insurance, withhold income tax and the like. These sorts of arrangements are often used by people who do a fair bit of contracting work, but don't want the hassles of setting up a limited liability company.


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## Bevdeforges (Nov 16, 2007)

How your "hobby" or "business" is classified for local purposes actually has little or no bearing on your US tax situation. (Unless, of course, you have a business form that is or can be considered a "certain foreign corporation" by the IRS - and for which there are additional reporting requirements.) 

Also, that $400 threshold applies to ALL your sources of income, not just your "self-employment" income. But how closely any of that stuff is looked at will depend on your overall tax and financial picture - and frankly, being resident in what is considered to be a "tax haven" does "add points" to your overall score, making it just that much more likely they'll want to take a closer look at your situation. It's up to you to assess the risks involved.
Cheers,
Bev


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## Costa55 (Apr 13, 2016)

Thanks very much for the additional info guys. I think instead of asking for special permission from the IRS to offset local tax vs SE Tax (and inciting more eyes on my situation) I might just fork out the 15.3% and live with it. 

As for the deductions and filing can you help me understand:

A) I think I saw before that if I take the FEIE on my 1040 then I wouldn't be able to take any other deduction or tax break, is this true?

B) Would I have any way of offsetting the 15.3% SE Tax? I see some articles mentioning that I can claim back half of the 15.3% as the "employer" portion of the tax, again not sure if taking the Foreign Earned Income Exclusion cuts me out of this. 

C) From what I see, I should only be calculating medicare etc on the self employment income. If I had $40K per year from my foreign job with the FEIE I would hate to find out I now owe 2.9% on this tax as well since I opened up the Self-Employment window.


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## Bevdeforges (Nov 16, 2007)

> A) I think I saw before that if I take the FEIE on my 1040 then I wouldn't be able to take any other deduction or tax break, is this true?


Not true. What is true is that any deductions you take will probably have to be prorated between the income you have excluded via the FEIE and the other income. Simple example: Let's say you exclude the full $100K against your salary and/or self-employment income. In addition, you have $50,000 in investment income that you can't exclude because it's "passive" income. Now say that you have $30,000 in itemized deductions (mortgage interest, and whatever else). 

You can't take the $30,000 against the $50,000 and thus pay tax only on the remaining $20,000. What you will have to do is to apportion the $30,000 in itemized deductions - which means it is assumed that $20,000 of the deductions applies to the $100K in income you have excluded, and only $10,000 can be deducted from your $50,000 in investment income, leaving $40,000 to pay taxes on.



> B) Would I have any way of offsetting the 15.3% SE Tax? I see some articles mentioning that I can claim back half of the 15.3% as the "employer" portion of the tax, again not sure if taking the Foreign Earned Income Exclusion cuts me out of this.


The IRS will only allow you to claim a tax credit for income taxes paid to a foreign country. And if you are subject to self-employment tax, then by definition, you paid both the employer and employee portions of that tax. You can't get it back from the IRS, though maybe there is some way to reduce whatever social insurances you have to pay in your country of residence.


> C) From what I see, I should only be calculating medicare etc on the self employment income. If I had $40K per year from my foreign job with the FEIE I would hate to find out I now owe 2.9% on this tax as well since I opened up the Self-Employment window.


You should only be paying the 15.3% SE tax based on your self-employment income, not on your salary income. You should be able to include your self-employment income in with your salary income, though, and exclude it under the FEIE. You would pay self-employment tax only on the income as reported on your Schedule C, though.
Cheers,
Bev


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## Moulard (Feb 3, 2017)

Further expanding on the point that Bev makes on deductions, is that you must also reduce your deductions related to that excluded income. If, say, you had a foreign earned income of 120,000 and excluded the maximum 100,000. You have excluded 83% of your foreign earned income. If you had $1000 in deductions attributable to that foreign earned income you would only be able to claim a deduction for $167 on Schedule A.


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## Bevdeforges (Nov 16, 2007)

One other note here - though you'll need to do a bit of research on this on your own to verify it all:

A while ago we were discussing whether self-employment income is eligible for the FEIE (which it most definitely is). But there were a number of posters who explained that in that case, you are supposed to declare your gross revenues from your self-employment and then file a Schedule C to claim your deductions. Under that scenario there could be some complications - however, there is also the possibility for some major simplification.

Say you have $60,000 in income from your "day job" and then take in another $20,000 with your self-employment. You declare both amounts as earned income on a form 2555, exclude the entire sum and you're done. No need (IMO) to bother with a Schedule C because the entire amount has already been excluded.

Now, in your case, if you are actually subject to the Self-Employment tax (which I still think you need to look into), you would want to file a Schedule C anyhow, just to reduce the amount you're paying SE tax on to your net income after your business expenses.
Cheers,
Bev


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## Costa55 (Apr 13, 2016)

Thanks again guys. Definitely a lot to consider, more than its probably worth, considering the minuscule amount of $$ to be earned with this side business, but its kind of a hobby/passion. One thing I'm still not completely sure of is the quarterly filing of SE Tax, seeing a few things in the instructions for 1040-ES that may apply. 

Exception. 
You do not have to pay estimated tax for 2017 if you were a U.S. citizen or resident alien for all of 2016 and you had no tax liability for the full 12-month 2016 tax year. You had no tax liability for 2016 if your total tax was zero or you did not have to file an income tax return.

Matching estimated tax payments to income. 
If you receive your income unevenly throughout the year (for example, because you operate your business on a seasonal basis or you have a large capital gain late in the year), you may be able to lower or eliminate the amount of your required estimated tax payment for one or more periods by using the annualized income installment method. See chapter 2 of Pub. 505 for details

Already getting a headache just trying to think of imaginary numbers to enter in these worksheets though, still can't believe the net income threshold is $400 annually or else you have to go through this: 
Worksheet 2-9 - 2017 Annualized Estimated Tax Worksheet

Worksheet 2-12 - 2017 Annualized Estimated Tax Worksheet—Line 12 Qualified Dividends and Capital Gain Tax Worksheet

Worksheet 2-13 - 2017 Annualized Estimated Tax Worksheet—Line 12
Foreign Earned Income Tax Worksheet


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