Specific Foreign Earned Income IRS form 2555 question

Question

I live in a western European country and qualify under the IRS Form 2555 Bona Fide Residence Test.

While living overseas, I continued to work for a US small company. My work had nothing to do with being overseas, but I was able to do the work while living there (remote computer work).

I never claimed my income in the country in which I lived, mainly because the US-based company was already deducting income / payroll taxes. Now I am filing my US taxes (some years late...oh my), and I cannot figure out how to proceed.

Does this income qualify as "foreign earned income" for the part IV "Foreign Earned Income Exclusion" of form 2555? My reading of it doesn't indicate why not. After filling it out, I come to the full amount earned from the US company on line 18 of $21k (i.e., I earned $21k over that year while living abroad, and it is less than the limit of $103k). This amount is entered as a negative number on Schedule 1, line 21 (Other Income). After some additional rental income, the total Schedule 1, line 22 is -13k.

Back on the main 1040 form, I have the full income $21k as line 1. The negative $13k from Sched 1 and some additional dividend income sum to $9k on line 6. After the standard $12k deduction, I am left with a refund of $3k.

So my questions are:

1. Does my income from the US company count towards the FEIE rule?
2. Have I approached this correctly (yes, I know I have glossed over details) ?

Answer 1

Does this income qualify as "foreign earned income" for the part IV "Foreign Earned Income Exclusion" of form 2555?

Based on what you've described, yes it does.

Does my income from the US company count towards the FEIE rule?

Yes. It doesn't matter who pays, what matters is where you earned it (unless you're employed by the US government). You earned it abroad, so it is foreign earned income.

Have I approached this correctly (yes, I know I have glossed over details) ?

From the US tax perspective you have, but you may have issues with the foreign tax authority, since you said that you haven't paid taxes there and you should have. Your employer may also have issues with the foreign tax authority since it is likely they're liable for payroll taxes in the country where you lived.