SE tax on Foreign Wages?

[Bay ArEA]

Ever seen someone do something you think is incorrect so many times, in such a big way, you wonder if you're the one who is wrong? Because that's what I'm going though. I just got a new client, and was looking at his last year's tax return as I always do to check for errors, and I found one so big that I am questioning if it is a mistake or not because I don't see how anyone could do it so wrong! For all of his last three tax returns he brought, his previous tax preparer had him pay Self Employment Tax based on his foreign wages minus his self employment loss.

Before I go and amend every year I can, I just wanted to make sure I wasn't the one in the wrong because of some crazy rule I never heard of. As long as he fits the definition of an employee, and meets the requirements for the foreign income exclusion, is there any reason he should be paying SE taxes on this money? Someone please tell me I'm not crazy.

[TAXNJ]

Tax issue only

Ever seen someone do something you think is incorrect so many times, in such a big way, you wonder if you're the one who is wrong? Because that's what I'm going though. I just got a new client, and was looking at his last year's tax return as I always do to check for errors, and I found one so big that I am questioning if it is a mistake or not because I don't see how anyone could do it so wrong! For all of his last three tax returns he brought, his previous tax preparer had him pay Self Employment Tax based on his foreign wages minus his self employment loss.

Before I go and amend every year I can, I just wanted to make sure I wasn't the one in the wrong because of some crazy rule I never heard of. As long as he fits the definition of an employee, and meets the requirements for the foreign income exclusion, is there any reason he should be paying SE taxes on this money? Someone please tell me I'm not crazy.

Who is wrong? Let us know.

A different profession can evaluate the crazy issue. But if you can read the attached, see if it addresses your tax issue:

http://www.irs.gov/Individuals/International-Taxpayers/Social-Security-Tax-Consequences-of-Working-Abroad

Hang in there

[Kram BergGold]

Wages and not SE

If he reported the income on Form 1040 line 7 he shuld not have computed SE tax. If you are sure he was an employee, then amend.

[mastertaxguy]

Se tax

Ever seen someone do something you think is incorrect so many times, in such a big way, you wonder if you're the one who is wrong? Because that's what I'm going though. I just got a new client, and was looking at his last year's tax return as I always do to check for errors, and I found one so big that I am questioning if it is a mistake or not because I don't see how anyone could do it so wrong! For all of his last three tax returns he brought, his previous tax preparer had him pay Self Employment Tax based on his foreign wages minus his self employment loss.

Before I go and amend every year I can, I just wanted to make sure I wasn't the one in the wrong because of some crazy rule I never heard of. As long as he fits the definition of an employee, and meets the requirements for the foreign income exclusion, is there any reason he should be paying SE taxes on this money? Someone please tell me I'm not crazy.

1. TTB P. 14-15 has information relating to foreign earned income exclusion and self employed individuals (right column, bottom of page).
2. Your 'facts' do not indicate the source of the earned income or the status of the employer.
3. From the IRS Web site:

When Social Security and Medicare Taxes Apply Outside of the United States
In general, U.S. social security and Medicare taxes continue to apply to wages for services you perform as an employee outside of the United States if one of the following applies:
You are working for an American employer which includes:
The U.S. Government or any of its instrumentalities
An individual who is a resident of the United States
A partnership of which at least two-thirds of the partners are U.S. residents
A trust of which all the trustees are U.S. residents
A corporation organized under the laws of the United States, any U.S. state, or the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, or the Commonwealth of the Northern Mariana Islands (with respect to the CNMI, refer to Revenue Ruling 80-167).
You perform the services on or in connection with an American vessel or aircraft and either:
You entered into your employment contract within the United States, or
The vessel or aircraft touches at a U.S. port while you are employed on it
You are working in one of the countries with which the United States has entered into a binational social security agreement (also known as Totalization Agreements), and the agreement provides that your foreign employment is subject to U.S. social security and Medicare taxes.
You are working for a foreign affiliate of an American employer under a voluntary agreement entered into between the American employer and the U.S. Treasury Department

4.

[AZUKHiker]

Check Totalization Agreement

In addition to the other comments check if there is a Totalization Agreement between the US and the country he worked in. These agreements prevent double payment of social security taxes when a US person works in another country (employed and self-employed). Such an agreement can prevent the payment of US Self Employment tax on foreign self-employed earnings although there are usually several hoops to go through to do this as instructed in the agreement.

Here is the list of agreements

http://www.socialsecurity.gov/international/agreement_descriptions.html

[Bay ArEA]

Thanks so much for all the helpful information! Glad to see I'm not crazy. I asked him a ton of questions to make sure his employer is indeed a totally foreign-owned and operated corporation and that he is indeed an employee, I have no idea why the previous preparer messed up so bad, oh well, I'll amend the last few years, it's going to save him about 8,000 each!