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I live abroad in South Korea/Japan, and got married to a South Korean last year (2016). We plan to move back to the US after I've finished graduate school. We are both self-employed: I'm a software developer, and she did a little English tutoring work. The vast majority of our income comes from my work (her ~$4,000 to my $55,000).

I file taxes with the US and pay self-employment tax. I've done the math in Turbo Tax for both filing separately and filing jointly, and the later gives me a higher return. To do that, though, I have to treat her as a US Resident Alien even though she isn't one (see https://www.irs.gov/individuals/international-taxpayers/nonresident-spouse-treated-as-a-resident). This means I have to report her world-wide income, which, I think, makes her $4,000 subject to US self-employment tax, too (see https://www.irs.gov/individuals/international-taxpayers/self-employment-tax-for-businesses-abroad).

And so that is where the problem is: she doesn't have a SSN, and, to my understanding, doesn't qualify for one. So, if she pays this self-employment tax, will that not be applied towards her social security benefits? I feel like I've misunderstood something.

  • What did you do about health care? Did you file 8965 exemption C for both of you? I am confused as there is an exception when choosing for a spouse to be treated as a resident. – mlt Jun 4 '18 at 19:36
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First, the SSN isn't an issue. She will need to apply for an ITIN together with tax filing, in order to file taxes as Married Filing Jointly anyway.

I think you (or both of you in the joint case) probably qualify for the Foreign Earned Income Exclusion, if you've been outside the US for almost the whole year, in which cases both of you should have all of your income excluded anyway, so I'm not sure why you're getting that one is better.

As for Self-Employment Tax, I suspect that she doesn't have to pay it in either case, because there is a sentence in your linked page for Nonresident Spouse Treated as a Resident that says

However, you may still be treated as a nonresident alien for the purpose of withholding Social Security and Medicare tax.

and since Self-Employment Tax is just Social Security and Medicare tax in another form, she shouldn't have to pay it if treated as resident, if she didn't have to pay it as nonresident.

From the law, I believe Nonresident Spouse Treated as a Resident is described in IRC 6013(g), which says the person is treated as a resident for the purposes of chapters 1 and 24, but self-employment tax is from chapter 2, so I don't think self-employment tax is affected by this election.

  • Few points of clarification: yes, we apply the Foreign Income Exclusion, but that does not apply to self-employment tax, and also I have about $5,000 of income I earned while spending 3 weeks in the US that the exemption does not cover. Also, I have investments and rental income from the US that the eclusion doesn't apply to. Yes, we will apply for an ITIN, but that wouldn't help if she needed to pay SE tax. But, thank you for pointing out that sentence, I think you're right: that should mean she doesn't have to pay SE tax even if she is treated as a NR Alien. – Nimrand Oct 1 '17 at 3:38
  • But, that still leaves me with one conundrum: how do I report her income so that it isn't subject to SE tax? Normally, I would have to enter it as self-employment income, and then exclude it using form 2555. But, if I do it that way, the calculations still come out as her owing SE tax. – Nimrand Oct 1 '17 at 3:43
  • @Nimrand: I believe the self-employment income is reported on Schedule C (or C-EZ) – user102008 Oct 1 '17 at 15:25
  • When you report NET income over $400 on Schedule C, the IRS guidance instructs you to file an Form SE also, which subjects her to SE tax... So, maybe I need to call the IRS and sort this out, ugh... – Nimrand Oct 1 '17 at 16:16
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    Followup for anyone else who finds this question: I called an IRS agent yesterday and after doing some checking, she basically corroborated this conclusion: report the spouse's self employment income on line 12 of the 1040 (which corresponds to Schedule C). Do NOT file a Form SE for the spouse (even though schedule C implies you should), as the spouse is not subject to SE tax as an NRA treated as an RA (but this can vary by individual tax treaties), nor does she need a certificate of coverage. It may be possible to exclude this income on Form 2555. – Nimrand Oct 3 '17 at 3:14

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