Embassy Worker W2, No Taxes Withheld

[FDNY]

Second year client US citizen works for the British Embassy.  No taxes withheld including SS and Medicare.  They give him a letter each year saying he is responsible for both ends of SS and Medicare tax because they have no way of withholding.  Although they do have a tax ID# on W2 so this makes no sense to me.  The letter goes on to say to use form SE but taxpayer is not eligible for self employment deductions, that’s fine, it’s W2 wages.  In order to use form SE  the only way I could get it to work is to use the clergy entries then at the bottom override the 1/2 SE tax deduction.  Form 8919 doesn’t apply here.  I forget where I was going with this, oh, anyone have any different method of doing this?  And does this even sound fair?

[Margaret CPA in OH]

Sorry, I don't have an answer but do have a question.  By 'tax ID#' do you mean Employer Identification Number ?  If so, I am curious how that could be as, to obtain one, I thought, by definition, one became an employer and responsible for withholding taxes and remitting appropriately.  This is weird and seems unfair somehow. 

You mention second year client - what did you do last year?

 

[FDNY]

Yes, sorry, there’s an EIN on W2, Employer name is British Embassy.  Last year I was able to jury rig the short SE schedule.   

[FDNY]

I hope you can read this, a page from the letter, see the summary at the bottom.

[FDNY]

Letter explicitly says to use Sch SE, as a way to pay both ends of employment taxes.  I wonder if the Queen knows about this.

[Margaret CPA in OH]

Well, I guess so long as the employee is aware and you can override where needed, it must be acceptable.  I suppose the embassy is a special employer in this sense.  Perhaps you should counsel this client about making estimated payments.  I do see where there is an additional 'allowance' included to mostly cover the employer's portion even if taxable.  At least it is something.  And by deducting half of the se on the return, that's about the same as being taxed on the full amount of salary/wages but having 7.65% withheld.   So just paying some tax on the extra amount included for employer FICA isn't too bad.  I will assume employee is well enough paid to accommodate this extra effort and gets a portion of tea and crumpets daily.

[Lion EA]

My memory is fried, but wasn't there someone going for confirmation who owed taxes and gave the TurboTax defense that he didn't know he had to pay SE tax as an embassy employee?! Not that that helps you figure out how to make it work in your software.

[FDNY]

I do have him paying estimated taxes.  I don’t think I can deduct 1/2 SE tax as he’s not self employed.  I guess foreign embassies are special employers.  He’s not highly paid, he’s probably a translator.    I know sometimes I have trouble understanding the accent. Tea and crumpets, a nice benefit.  My wife once worked for an English law firm and tea and crumpets everyday at 3.

[Margaret CPA in OH]

Well, he isn't self employed but he is required to file Form SE and has to pay both halves of the SE tax so I would argue that it is correct to deduct half from his taxable income.  In my opinion, the math works more fairly but it is your client and you and client sign the return.  It's a weird one for sure.

[FDNY]

2 hours ago, Margaret CPA in OH said:

Well, he isn't self employed but he is required to file Form SE and has to pay both halves of the SE tax so I would argue that it is correct to deduct half from his taxable income.  In my opinion, the math works more fairly but it is your client and you and client sign the return.  It's a weird one for sure.

You know, now that you made me think about it that makes a lot of sense.  I’m going with it.  Thank you for your help, and keeping with the theme of these posts, Cheerio my good friend.  

[jklcpa]

Helpful info in these links: 

https://www.irs.gov/individuals/international-taxpayers/employees-of-a-foreign-government-or-international-organization-fica-including-social-security-and-medicare-tax

 

https://www.irs.gov/individuals/international-taxpayers/employees-of-a-foreign-government-or-international-organization-how-to-report-compensation

[Pacun]

File Schedule C and SE with NO DEDUCTIONS whatsoever.

What they have not shown you is the other letter where the embassy tells them: "We are going to pay you 100K for your services but we are going to give $113,650 because embassies don't withhold any tax money for the US."

All embassies, the monetary fund, the world bank, etc. do that. 

[Margaret CPA in OH]

Judy, thanks for the links but I didn't see specific ways to address compensation on a W-2.  Which leads to Pacun's statement to report on Sch. C.  However, unless the W-2 shows statutory employee and can be listed/input as such on Sch. C, I don't see this as a solution, at least using software that has restrictions.  I'm glad this isn't my client and problem but always good to learn about different wrinkles in our tax and reporting system.

[Pacun]

1 hour ago, Margaret CPA in OH said:

Judy, thanks for the links but I didn't see specific ways to address compensation on a W-2.  Which leads to Pacun's statement to report on Sch. C.  However, unless the W-2 shows statutory employee and can be listed/input as such on Sch. C, I don't see this as a solution, at least using software that has restrictions.  I'm glad this isn't my client and problem but always good to learn about different wrinkles in our tax and reporting system.

about 10 years ago, I started filing Schedule C for a person that worked for the monetary fund. The person showed me all the letters from the employer and they showed that her salary was X and that she was getting X*1.13 or something like that because the employee was responsible for all taxes.  (This situation is common in DC). One year, she attended a training and we took $3K deduction on Schedule C, the IRS sent her a letter and said "Any expenses need to be reported on 2106". So that's why I said schedule C with NO EXPENSES whatsoever.

This extra money are given to US citizens and to legal permanent residents. I have a couple of clients that do not accept a "Green Card" from immigration because all the money they are getting is tax free but as soon as they become a green card holder they will have to pay taxes.  Think about this: You have a nice position and making $150K a year and no kids. The embassy appreciates you and your non-inmmigrant visa is guaranteed. Also you get $150K, pay no taxes... why do you want a green card if it will cost you $30K every year?

And by the way, it is legal for these organization to not hold taxes and it is also legal for this money paid to non-immigrant visa holders not to be taxable. 

[jklcpa]

2 hours ago, Margaret CPA in OH said:

Judy, thanks for the links but I didn't see specific ways to address compensation on a W-2.  Which leads to Pacun's statement to report on Sch. C.  However, unless the W-2 shows statutory employee and can be listed/input as such on Sch. C, I don't see this as a solution, at least using software that has restrictions.  I'm glad this isn't my client and problem but always good to learn about different wrinkles in our tax and reporting system.

The second of those two links said to report the compensation as wages on the 1040 and complete schedule SE. It doesn't say anything about reporting it as self-employment income on Schedule C. Of course making the software do this is another matter.  Are overrides even possible in ATX to complete Sch SE?

[Margaret CPA in OH]

Right, I read that but it was the 'making the software do this' that tripped me up.  And even then, if hand preparing, which line does one fudge and answer less than truthfully?  Again, happy I am not faced with this.  There should be easier accommodations for such situations especially given Pacun's litany of the number of possible employees/not self employed required to file SE in this situation.  Good luck with your solution, FDNY!

[jklcpa]

2 minutes ago, Margaret CPA in OH said:

Right, I read that but it was the 'making the software do this' that tripped me up.  And even then, if hand preparing, which line does one fudge and answer less than truthfully?  Again, happy I am not faced with this.  There should be easier accommodations for such situations especially given Pacun's litany of the number of possible employees/not self employed required to file SE in this situation.  Good luck with your solution, FDNY!

If doing it by hand, the W-2 would be reported as wages and Sch SE instructions actually address this and say to report it on Sch SE line 2. 

[jklcpa]

Well, you forced me to get up and look at my software if I had one of these. (not feeling great today)  There is no special code to allow the wages to flow directly to SE. The entries from the W-2 input would carry to the appropriate wage line of 1040, AND then the preparer DOES have the ability to enter an amount directly on SE for line 2 as "other SE income". Perhaps ATX has a place like that.

[Margaret CPA in OH]

So sorry  you aren't feeling so great.  And yet isn't it interesting how some of these things just bug us and we can't let go.  ATX does have a jump from Line 2 for adjustments up or down and blank spaces where one could input, I don't know, embassy wages or something more erudite.  Than it does actually discount by 7.65% for the tax and half goes to Sch. 1 II line 14 as it all should.  Once again, Judy comes through, even in her discomfort, to lead us to the right path. 

Thanks as always, Judy!  Now feel better soon.  I know I am delighted to have learned so much from this exercise!

[jklcpa]

Always easier when it isn't my client and being pressured to complete the return.

[Catherine]

2 hours ago, Margaret CPA in OH said:

which line does one fudge and answer less than truthfully? 

The metric isn't "truthfully" but rather "proper presentation of taxable income and taxes" and it's not less-than-truthful when there is no proper provision for these infrequent cases on a one-size-fits-most form.

[Catherine]

14 hours ago, FDNY said:

You know, now that you made me think about it that makes a lot of sense.  I’m going with it.  Thank you for your help, and keeping with the theme of these posts, Cheerio my good friend.  

The half-of-SE deduction is because that part "isn't supposed to be" income but rather the employer contribution that the employer, in this case, can/need not pay.  So excluding that portion from taxation of income is appropriate and proper.

[Pacun]

I am surprised the experts on Embassies have not commented on this. 

Schedule C and no deductions is the way of doing it.

 

[Margaret CPA in OH]

Ummm, I'm now with Judy on this having seen the way to go through Line 2 on SE.  I tried it on a return and it flows just right. 7.65% is the reduction for the SE tax calculation so comes off Sch. 1 Line 14.  It works and thanks again to Judy for ferreting this out.  If this ever arises in my practice, I would not use Sch. C.  I would follow exactly what works on Sch. SE.

Good exercise!

[joanmcq]

And good to learn!