Foreign Income as self employement

[Sibora]

I have a client with income from Australia as self-employer. While I am putting all information on 1116 form and 2555 form it still shows that he needs to pay self-employed tax and he is not supposed because US has the agreement with Australia. I want to know please what the steps are to report that income? So, you first create schedule C as usual? Is it a way for schedule C to flow on those foreign forms? Am I missing a step, or do I need to do any adjustment manually? 

[Terry53029]

I am not familiar with the  Australia treaty, but if you want to exempt any schedule C income from SE tax you use the schedule SE adjustment work sheet, and I would put the amount exempt in part 2 line 7. I would also put the treaty description and amount in the supporting documents statement (letter icon to right of amount line 7)

[sjrcpa]

There's a form to use to report a treaty based return position. 8833

[TaxGuyBill]

If you are filing 1116 and 2555, it sounds like your client is a US Citizen or US Resident Alien, right?

Yes, the income and expenses are reported on Schedule C.  The reduction of income tax is on the 2555 and 1116.

If your client is exempt from Self Employment tax because the he pays Social Security to Austraila and the Totalization Agreement says he is only subject to Australian Social Security, I'm not sure if ProSeries is set up to do that and I just looked and couldn't find a way.  If it isn't, you might need to do things manually and paper-file the return. As for what the tax return should show for that, see the links below.

https://www.irs.gov/pub/irs-utl/2019ntf-30.pdf#page=17

https://www.irs.gov/instructions/i1040sse#en_US_2022_publink24334pd0e305

[Sibora]

Yes, that is correct. He is a US citizen but lives and work in Australia. I have completed the 2555 and 1116 but through those forms I am not being able to adjust his Self-employment tax. Every entry that I have made on those forms is not changing nothing. Am I doing something wrong on completing those two forms? Yes, it is the agreement between USA and Australia, thank you for the links.

But is it not correct to adjust the self-employment on schedule SE like suggested above? It looks like that is the only way for him not to pay tax. I am getting really frustrated because I have been working on this case for one week and not being able to find a solution. No one ever had these case before. Is it really necessary to do a paper return? That is no other way? 

[Sibora]

I am not being able to find that form 8833 on ProSeries. Where do you find that?

[Terry53029]

@Sibora Form 8833 is not in ProSeries, and you will have to download from IRS, and attach as a PDF. You can find the SE adjustment worksheet, by clicking on "where do I enter" green icon on top menu, and type in SE. it will be listed in the dropdown menu

[Sibora]

@Terry53029 I think in his case he does not need to file form 8833 because he can "claim a reduction or modification of taxation of income under an International Social Security Agreement or a Diplomatic or Consular Agreement." Which in his case there is an agreement between the Australia and US.

Yes, that worked. I did adjust his self-employment tax on SE adjustment worksheet and include in the statement explanation of the Agreement. So, the next step is to finish complete 1116 and 2555? 

[Terry53029]

You can't take both on the same income. choose the one that gives you the best tax outcome

[Sibora]

@Terry53029 Thank you! 

[Terry53029]

You are welcome

[TaxGuyBill]

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@Sibora wrote:

and include in the statement explanation of the Agreement.

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Does your client have a "certificate of coverage" from Australia?  That needs to be included with the tax return.  And did you figure out how to enter the statement next to line 4 of Schedule 2?

[yosefacpa]

A totalization agreement is not a treaty.

[yosefacpa]

8833 is not available in ProSeries, at least through 2022. WHEN RELEVANT, you must fill out a PDF 8833 and attach it to the e-file with a note, or paper file. However, I do not believe applying a totalization agreement is a treaty position.