Cruising Both Ways

Hi June!

I need help! Here's one for you: I am a cruise ship employee from Manasquan, NJ and I've worked for Choppy Cruises for over 4 years.

My issue is that, technically, I am not self-employed but I get a 1099 from Choppy every year. I pay my taxes but this year I owe a ridiculous amount and I'm frustrated!

I have to pay a self-employment tax but I am an employee of Choppy. I wear their uniforms, abide by their contracts and rules of the ship. They pay my flights and feed and house me. I work outside of the USA but my pay is wired directly into my bank account out of their USA bank account. I save my receipts and write off as much as I can. I know some other Americans from the ship who don't pay taxes on their income.

Am I an idiot?

Is there some maritime tax law I don't know about? Is there any way to get around paying the self employment tax?

Please help!!
Paige


Hi Paige,

"Am I an idiot?" My guess is that you are not an idiot. But you do want to have your cake and eat it too. Apparently, you weren't concerned about the probable misclassification as a self-employed until it was disadvantageous to you.

You must decide whether you want to educate yourself on self-employed status and then whether or not you want to take action based on what you learn.


Be sure to read my post Cruise Ship Entertainer Gets No Tax Breaks

By the way, the folks not claiming income are committing fraud. Not good.

I changed the name of your cruise company ... just in case.

Best,
June

US Citizen Working Abroad

Hi June,

Firstly let me say your book is amazing, very well written, a joy to read and I was so happy to find it. The book answered most of my questions on self employment but also made me question if I actually am self employed?

Below are my specifics, if you could give me your opinion I would be very grateful.

Background: I work part time for a German company as a sales rep selling to the US stores on the US Military bases in the UK. I have business cards from the company with my name on them, a company e-mail address and am listed on the company org chart as a manager. I go to company sales meetings am told what needs to be done but pretty much left alone as to how I execute the programs in my territory (the UK) and have no other clients don’t advertise etc etc. However the company requires me to submit invoices monthly for services rendered and also pays any expenses and travel costs I incur.

As I live outside of the US I claim these as Foreign Earned Income on my 1040 and have always thought I was an employee and have always filed as such even though the German company said I was a contractor. I am not provided a W-2 or a 1099.

My problem, question is I guess a grey area:
1) Am I actually an employee or self employed?
2) If I am an employee then how do the Social Security Taxes get paid or are they even required as the company is German and has no US office?
3) If I am self employed I will have to re-file from previous years to pay my social security taxes, but then can claim all the deductions associated.

But by following your tests I’m not sure the IRS will agree I’m self employed but as it’s a German company I’m pretty much lost and have not had any luck finding anyone with a clue? Until I found your book that is, hopefully you can answer a few questions and point me in the right direction.

Anyway you must get lots of letters like this but thank you again for writing such a great book.

Regards,
Grant
Frankfurt, Germany


Dear Grant,

Thank you for your generous comment on my book.

I do get lots of letters but those that are multi usually multi-state not multi-country!

You are an employee and your employer should be treating you as such with the appropriate withholding.

I have clients in Germany who are US citizens who are self-employed. I also have clients in Germany who are US citizens who are employees of German companies. I have no experience with a US citizen living in the UK working in Germany. I do not know about reciprocal tax agreements between the UK and Germany and that may come into play here. That said, here's as far as I can point you:

Those clients who are employees of the German companies have German taxes withheld -- Germany's equivalent of our Social Security and Medicare Tax [self-employment tax for an indie -- SE Tax] as well as German income tax. On their US tax return they get credit for German income tax paid. If they qualify they also get the foreign earned income exclusion. There is an option to voluntarily pay Social Security tax to the US.

If you choose not to confront your employer on this then you must pay your own SE Tax to the US government same as a US citizen living in the States. Check out these posts taxes -- self-employment tax for more info on SE tax. Also be sure to read my blog post How are your plumber and the Treasury Secretary nominee alike?

Yes, you can, and should, file amended tax returns.

You might try the embassy for a tax pro recommendation.

I wish you success!

Best regards,
June

Graphic Artist in London

Dear June,

First, thank you for taking the time to help me with my questions and concerns.

I am a freelance artist and designer, I have been freelance for about 20 years.

This coming June 2009, I will be going to London, where my son will attend school for 1 year. Because I used to live there as I was married to an Englishman, and my other two sons are already there with dad, I have the ability to work in London legally.

So my question is about taxes. Will I have to pay taxes to the US on the money that I will be earning in the UK, as well as paying taxes to the UK on the same money? If I have to pay taxes to both countries, I will end up with very little, so I am not sure at all about these tax rules.

I would appreciate any help that you can provide about this situation.

Sincerely,
Adrienne
Winter Springs, FL


Dear Adrienne,

This is how it works from the US side.

You must pay Self-employment [SE] tax on your net self-employed earnings. (Take a look at these posts for more info on SE tax -- taxes -- self-employment tax (7) .)

Since you will be out of the country for a relatively short time you must pay income tax just as you would were you living in the States.

If you were out of the country for an extended period of time -- think of it as almost a year, and the time can straddle years -- close to $90,000 of your income would not be subject to US income tax. But, you must still pay SE tax.

If you must pay income tax to the country you are in then the US will give you credit for taxes paid to that country. That means you will not be doubly taxed. Each country has its own tax laws so you must ask the taxing authorities in the UK what are your tax obligations.

Also be aware that the US has reciprocal tax agreements with many countries.

You might want to take a look at these posts foreign situations (7) .

And, you are welcome!

Best,
June

Assistants Working Abroad

Hello June,

Thank you for the great site! I've just ordered your book, Self-employed Tax Solutions, from Amazon and cannot wait to read it.

I've read almost every post on your blog and found a question similar to mine, but there is a difference so i still wanted to ask. I do freelance web and graphic design. I order illustrations for my projects from an artist friend. She is not US resident, she lives in Israel. I pay her through PayPal or sometimes cash. Can i deduct the fees?

And if yes what kind of receipts/records do i need? Are PayPal receipts enough?

In your answer to Charles (Cruise Entertainer...) you say: "His payments to them are business deductions and all he must do is keep a record of payment. No 1099 is required. This is because the work is being performed outside the US."

But in my case, while her part of work is performed outside the US, me and my clients are in the US... What should i do?

Thank you so much,
Rina

New York


Dear Rina,

Glad you like my site. Thanks for letting me know. And I'm sure you will get lots out of my book.

Yes, you may deduct the fees. Print out your PayPal receipts and also keep a written record, of what you paid her for -- perhaps a copy of the illustration.

There is paperwork to do -- but of course! Be sure to read my post When your subcontractors are in India for guidelines.

Best,
June

Freelance Income from Portugal

Hello June,

My husband is a self-employed journalist. He has income coming from an employer in Portugal we live in the USA. We have a home office that he works in at least 12 hours everyday. I have been writing off the income as self-employed income. There are no taxes taken out on this income from the foreign country.

I call IRS several different times they said two things use a form 1116 or write it off as self-employed income. One person said he was not sure and went to ask someone else. I wanted to hire and accountant this year but our income seem to drop each year.

Therefore, we do not make enough income to afford an accountant or tax officer. I have had an accounting and tax course in the pass but as you know the laws are always changing. My question is how to file this income? Should we get Portugal to take taxes out on this income?

Evone from Orange, NJ


Dear Evone,

I assume you used "employer" incorrectly and that you mean the person or business in Portugal that paid your husband for his freelance services.

Your husband's income from Portugal is treated the same as his freelance income from any other place. It is all his self-employed income.

Do not request that taxes be withheld for Portugal. That's their job! If the payer did withhold Portugal taxes then you would file Form 1116 to get credit for taxes paid to a foreign government.

Best,
June

Check out my book Self-employed Tax Solutions. It will simplify your tax and financial life, and save you money!

Cruise Ship Entertainer Gets No Tax Breaks

Many months ago I received the email below from Charles, a cruise ship entertainer. Charles and I have exchanged email over these months. I had questions for him prompted by my many conversations and correspondence with the IRS. At times I waited weeks for a response from the advanced tax law section of the IRS.

Here's the situation:

Hi June,

I really appreciate your site and what it has to offer... Excellent, clear, understandable advice and information.

Here's my question in two parts: I work as a guest entertainer on cruise ships. I spend most of the year away with a few weeks at home.

I also hire dancers and technicians on the ship for my show and pay them in cash onboard. They are not US citizens and do not get a 1099 from me. I simply have a record of paying them. Do I need to send out 1099's? Is there another way I should do this? It adds up over the year to a considerable amount.

The second part is that if I'm spending 330 days outside the US on the ship, do I qualify for the foreign earned income exclusion? Or, if not, since I pay for meals, etc. is there a per diem amount I can use for those days out at sea or in port in other countries.

There's not a lot of info for us cruise ship workers, but I hope to learn more.

Best,
Charles

I also learned from Charles that the ship is registered in the Bahamas and he is paid by the cruise line. He visits up to 20 or more countries each year and is in US ports sometimes for a few hours. He's in international waters about 95% of the time.

When not on a ship he lives in Las Vegas, Nevada. He has a house there and a Nevada driver's license. Charles says that he does not consider Las Vegas his place of residence since he is never there. "I live on a boat but visit my house once in a while to dust," is what he tells people.

The ship provides accommodations, but Charles pays extra for meals and incidentals.

My findings ...
The good news is that Charles is doing it right regarding the independent performers he hires. His payments to them are business deductions and all he must do is keep a record of payment. No 1099 is required. This is because the work is being performed outside the US.

The bad news is that someone in Charles' working situation does not get a business travel deduction for meals and incidentals. The IRS gives a deduction for expenses incurred while away from home, such as the per diem for meals and incidentals, to alleviate the burden on someone whose business needs require him to maintain two homes. "Home" in this circumstance refers to the principal place of work, not the personal residence. The exception for this circumstance is when the work is "temporary."

And then there's even more bad news. A US citizen may exclude up to $82,400 income earned in a foreign country or countries if he is a bona fide resident of another country or countries. [Read more about foreign earned income here.]The cruise ship travels to many countries and through international waters. Charles resides on the ship. The Bahamanian ship is not considered a residence in the Bahamas. Charles is an itinerant and so gets no foreign earned income exclusion.

Homeland Security or Jobs 'n' Things

A while back I received the following email:

Hi June,

I'm almost done with your book, it has been and will continue to be extremely helpful. Very well put together, great job!!!

Now for my question: My husband and I were recently replaced by illegal immigrants on our w-2 job (janitors). My question is, how can an employer get away with hiring illegals that have no ss#'s, no drivers licences, or licences from another state.

Thank you June.
Yvonne, from Urbana, Illinois

Even though this is a question about W-2 people and not indies it certainly could apply in self-employment situations. And I thought the answer to Yvonne's question was going to be quick -- something like: They get away with it because nobody notifies the authorities. Then I was going to tell her to call her local Department of Labor (DOL).

I expected a quick confirmation of my planned response by a call to my local DOL. And that's where the marathon started.

If you have been replaced by an undocumented worker – or, the term I prefer, an illegal alien – there isn't much you can do about it. Neither the federal government nor most of the state governments are doing anything to protect American workers from getting pushed out of jobs by cheaper illegal alien workers.

Once upon a time government was a friend of the working people – adopted laws that helped them to organize, protected them against unfair employment practices. That feels like a long time ago. In fact “the Department of Labor” born in the New Deal, would be better given the 21st century name of "jobs 'n' things." In Illinois, state of my blog visitor -- the name has been changed to the Department of Labor and Human Rights. In New Mexico the DOL has been renamed the Department of Workforce Solutions.

And if you look up state websites for the department with oversight over labor matters, there’s nothing about undocumented workers to be found on them. In most states there appears to be no agency that has any jurisdiction over them.

You’ll find, for instance, a notice posted on the website of the North Carolina Department of Labor – that it “does not have anything to do with immigration or the working of documented or undocumented alien workers. For general questions or information on immigration, you need to contact the North Carolina Employment Security Commission's (ESC) Immigration Section in Raleigh.”

But when my office called the North Carolina Commission, we were told that it has nothing to do with undocumented workers either.

But, if you are the sort who refuses to give up, and you’ve lost a janitorial gig in Illinois, try the Illinois Department of Labor (IDOL). According to Anjali Julka, who handles departmental press relations, you can file a complaint.

“If they feel that they’ve lost their jobs for reasons that might fall under our authority, they can file a complaint and see what action we can take.” A formal complaint, she said, “would certainly prompt the department to review their case at least and see if it’s not us that can help them, who can.”

Minimum wage violations or failure to pay overtime may be valid issues, Ms. Julka noted.

A complaint form can be printed from the IDOL website and mailed into the Department, or the forms can be picked up at any IDOL location, or can be requested by telephone.

“An investigation by our department would determine if they have been wrongfully terminated,” Ms. Julka said. “There’s no need to provide any information other than what’s printed on the form.”

And if you don’t mind whether your grievance at being replaced by illegal aliens might take a decade or so to clear up, you have one more long shot – you can report the case to Immigration and Customs Enforcement [ICE], a bureau of the federal Department of Homeland Security.

Don’t hold your breath, though. A Senior Special Agent in an ICE regional office lamented that he has two Special Agents to cover an 18-county area in one of the fastest-growing areas for undocumented workers in America.

The agent (speaking on the condition of anonymity) said that “the government is overwhelmed” because of a shortage of people in Homeland Security. He suggested that the aggrieved parties try anyway.

How long would it take to get action? That, he responded, depends on the priorities of the local office. “The report is taken and it’s taken to the field and prioritized. Maybe never, maybe immediately,” he said. “National security-related issues, probably immediately. Politically-motivated issues, maybe quicker. If you could only spend a day in your local ICE office and see what happens, the volume of work and what kind of resources they have, you’d have a good understanding. But this isn't like the private sector where when you get a demand for your product you increase your manpower.. . . If were up to me we’d have an agent for every illegal alien. Well, maybe one for every thousand.”

So, it was asked, an average time wouldn't mean much because much depends on the urgency of the matter? “Yes, an Osama bin Laden sighting would take precedence. . . . and unfortunately we don’t have the physical manpower to address every single issue. And it might be a supervisor’s decision to not assign it to somebody.. . . I wish I had a good answer.”

New Mexico Workforce Solutions (formerly Labor Department) -- its vision statement saying, "The New Mexico Department of Workforce Solutions is a World-Class, market-driven workforce delivery system that prepares New Mexico job seekers to meet current and emerging needs of New Mexico businesses" -- appears eager to welcome willing hands from south of the border. A Workforce Solutions official pointed out that Santa Fe has designated “a safe haven for illegal immigrants – they can hang around there, they take them burritos in the morning, and employers come by and pick them to take them to day-labor jobs.”

Many illegal aliens work at construction sites. U.S. Commerce Secretary Carlos Guttierrez comes on a news show every once in a while to tell us “that we have to face the fact that there are jobs that Americans are unwilling to do.” But I don’t think Americans decided that they don’t want construction work or janitorial work anymore. I think they’re being displaced by undocumented workers willing to take these jobs for much, much less money. That’s really what the undocumented workers issue is about, and in the long run it isn't good for American indies or for Americans generally.

Canadian working in USA

June,

I've been an entrepreneur for one year. I really need help about filling out a W-8BEN tax form correctly. I am a Canadian citizen living in Canada and I have a website about travelling. I recently applied to an online affiliate program Commission Junction (CJ) that is located in the U.S. and they sent me this form (W-8BEN) to fill out. Do I have to fill out lines 7, 10, and check off 11? I really don't know. I'm really confused about lines 10 and 11 and don't know if I should just leave it blank.

Hope you can help me.
Best Regards, Jay B.


Hello Jay,

My policy is not to give online instruction on preparation of specific tax forms. I suggest you read this post: When your subcontractors are in India . In it there are phone numbers for instruction on Form W-8BEN.

Best regards,
June

Foreign Earned Income

Hello Annie,

Sorry for the tardy response, there have been sooooo many questions.

I've embedded responses below. Seems a bit easier this way.

It's good that you're reading my book. I'm sure you'll learn much from it.

Best,
June

Hello June,
I'm 25, have filed my own taxes two times in my life, and in January 2007 I quit my job as a production editor to become a freelance production editor for the company I had just quit. I work about 20 hours a week and make about $30/hour. By the time April 15 rolls around, I will have received paychecks totaling about $2000. I'm reading your book right now and trying to figure out the estimated quarterly taxes I'll be paying, but I have other questions about my situation.

I've applied to grad school in Australia and will be moving there in July. On a student visa I can work 20 hours a week in Australia, but my company will also let me continue freelancing.

Do I have to pay taxes to the IRS on the work I complete while in Australia? ... yes

If you are out of the States long enough there is an exclusion for income tax on foreign earned income up to $82,400 . However, although you are living abroad, it appears as if your income is "virtually" earned in the USA. If so you'd get no deduction on your indie income. .

If I stay in Australia for 5 years but keep freelancing for American companies, do I owe tax? ... yes, but how much depends on where it's earned.

If I buy a $1000 laptop before April 15, can I deduct any of it on my first quarterly estimated tax payment? Estimated taxes don't work that way. Read this Estimated Taxes here on my blog.

And finally, I don't have a tax professional, but should I get one even though I'll only be in the US for three more months? Yes, you should get advice because you have foreign earned income. Be sure to consult with a tax pro who understands foreign income and USA reciprocal tax treaties with foreign governments as well as self-employed income!

Good Luck in Australia.
June

When your subcontractors are in India

June,


This is Dan again, from Quicken or Quickbooks .


Now for a different question: I mentioned that I am working with overseas developers in India. Taxwise, how do I handle this? Is there something that I am supposed to file? These developers are in no way my employees. They work under their own companies and I am contracting a certain amount of work to them.


Thank you very much for answering my questions.




Dan, you must withhold 30% federal tax on the income of the people who live and work for you in India. Each of them should complete a W-8BEN: Certificate of Foreign Status .... etc. You will need to file a Form 1042 [they each get a 1042-S at year-end] . You can get more information on this from the IRS at 866.455-7438 and you can get info on filling out Form 1042 also from the IRS at 215.516-2000.


Not all foreign workers have to be withheld at 30%. With some countries the US has reciprocal tax agreements and so that changes the mandatory 30%. At my latest understanding, we did not have such as agreement with India. But, check it out. Things are happening at web-speed.