Today TaxMama® hears from Angel in the TaxQuips Forum with an interesting issue. “My client is a United Nations employee. Last year she earned [a modest sum] while working at the UN in New York City; then took a posting in Spain with the UN where she earned [well over the foreign earned income exclusion amount]. The UN does not withhold income taxes or FICA in either case.
For the NY income we file a Schedule C and Schedule SE in order to ensure Social Security and Medicare are charged correctly. However, is the foreign earned income from Spain liable for FICA? Or should the foreign earned income be listed as other income on the 1040? Although Spain is listed as one of 24 countries with reciprocal agreements, I believe the UN is a completely separate government by itself.”
That’s an excellent observation. It’s a special issue. When working in an embassy for a foreign government, the US employee must pay all the self-employment taxes on those earnings. But, they are still considered an employee and can only deduct job-related expenses on Schedule A, not on Schedule C.
(The IRS made this clear back in 2006-2007 and offered an amnesty program at the time.)
If she were working for a business in Spain, there would be no question. And you would not be asking me.
Her income would be subject to the foreign earned income exclusion. And as an employee of the business, she would be exempt from self-employment taxes.
You’re right. The UN is a different matter.
I searched the Tax Court database for references to the United Nations. All the cases I found were for people working for the UN in the US. The search didn’t turn up anything about a UN worker outside the US. But I know I have seen at least two cases a couple of years ago.
So…I recommend that you search the Tax Court database for “Form 2555” and see if you can find any relevant cases. There were too many results for me have time to look them up for you.
But you’re pretty smart. You’ll find the right citations.
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Incidentally, I just stumbled across this information as I was posting this TaxQuip – and it seems that the IRS changed their position on wages from certain embassies and international organizations. The wages may, in fact, be exempt, if the employee and the job meets certain qualifications.
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Do some reading and get some more details about this!
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