Welcome back! Ask questions, get answers, and join our large community of tax professionals.
cancel
Showing results for 
Search instead for 
Did you mean: 

Self-employment tax (foreign partnership)

Highlighted
Level 2

Hello. My clients are U.S. citizens who reside in a foreign country. They created a partnership in the foreign country and all income income was earned in the foreign country.

Assuming the foreign country does not have a totalization agreement with the U.S., do they have to pay SE tax to the US? 

Thank you.

Labels (1)
0 Cheers
1 Solution

Accepted Solutions
Level 15

If, and that's a BIG "if", the foriegn entity is treated as a partnership for US tax purposes, your client will be subject to SECA as a partner.  In the event the entity is classified as an association (i.e. a corporation) - more on that below - your client should then be treated as an employee and, consequently, not be subject to either SECA or FICA.

You should note that the rules of foreign entity classification under §7701 work a bit differently compared those applicable to domestic entities.  Much of that is predicated on whether one or more of the partners do not have a limited liability.  Otherwise, CTB election must be made for the entity to be treated as a partnership for US tax purposes or the entity would be classified as an association by default, which means it could be a CFC and there could be implications in relation to Subpart F, GILTI, etc.

The pros and cons of making the CTB election should have been weighed out at the time of formation as electing to change the classification at a later time could trigger recognition events.

---------------------------------------------------------------------------------
Still an AllStar

View solution in original post

3 Replies 3
Level 15

If, and that's a BIG "if", the foriegn entity is treated as a partnership for US tax purposes, your client will be subject to SECA as a partner.  In the event the entity is classified as an association (i.e. a corporation) - more on that below - your client should then be treated as an employee and, consequently, not be subject to either SECA or FICA.

You should note that the rules of foreign entity classification under §7701 work a bit differently compared those applicable to domestic entities.  Much of that is predicated on whether one or more of the partners do not have a limited liability.  Otherwise, CTB election must be made for the entity to be treated as a partnership for US tax purposes or the entity would be classified as an association by default, which means it could be a CFC and there could be implications in relation to Subpart F, GILTI, etc.

The pros and cons of making the CTB election should have been weighed out at the time of formation as electing to change the classification at a later time could trigger recognition events.

---------------------------------------------------------------------------------
Still an AllStar

View solution in original post

Highlighted
Level 2

Thank you very much. Your response is very helpful.

0 Cheers
Highlighted
Level 15

NP, @bmanglonacpa!  Glad it is of help to you.  Goodnight.

---------------------------------------------------------------------------------
Still an AllStar