I started doing consulting work under an international company. How do I navigate my tax situation?

Ryan

I am working with a company registered in South Africa doing consulting work with their clients. I don't know how to manage my tax situation. Could you share any insights on how to manage this?

KristineS

Hi Ryan,

Great question! There are several considersations in answering.

First, are you an employee of the company or are you an independent consult, i.e. self-employed?

Second, are you yourself working in South Africa? Or that's just where the company is located and you're working somewhere in the U.S. for this company (or another country, but are a U.S. citizen) ?

Third, if you're working outside the U.S. in South Africa (and not a government employee), the amount of time you spend living and working in South Africa might allow you to exclude a portion of the income you make on your tax return.

The IRS states U.S. Citizens and resident aliens need to report all 'worldwide income' on their U.S. tax return.

Assuming you are a U.S. Citizen or resident alient working from here in the states, if you're an employee of a U.S. based company you will report whatever income you are paid on your tax return just like any other employee might. If you're paid in U.S. dollars that makes it easy. If you're paid in South African Rand you would need to do some conversion from Rand to dollars and keep track of the method used for conversion should the IRS ask.

You may or may not receive a W-2. If you do, that can make it easier to report like any other W-2 received from an employer. If you don't receive a W-2, but a summary statement of income made for the year or something similar, the income may end up being reported as Other Income on your tax return, and subject to U.S. income tax laws. There are also rules about how or if you report taxes withheld from your pay and paid to a foreign government, not the U.S. Treasury. FreeTaxUSA software will guide you through this process.

If however, you're self-employed, the income is reported as Self-Employment income on Schedule C and is subject to both U.S. income and self-employment tax rules. The same conversion rules apply from Rand to dollars. You will also be able to deduct expenses related to the production of this income, decreasing the amount of tax due.

Although FreeTaxUSA does not support Form 2555, if you qualify, "you can use Form 2555 to figure your foreign earned income exclusion and your housing exclusion or deduction." This means you would first report the foreign earned income on your tax return, and then remove or exclude it from your income, essentially making it tax free. Here's how the IRS defines it:

"𝘍𝘰𝘳𝘦𝘪𝘨𝘯 𝘦𝘢𝘳𝘯𝘦𝘥 𝘪𝘯𝘤𝘰𝘮𝘦 𝘧𝘰𝘳 𝘵𝘩𝘪𝘴 𝘱𝘶𝘳𝘱𝘰𝘴𝘦 𝘮𝘦𝘢𝘯𝘴 𝘸𝘢𝘨𝘦𝘴, 𝘴𝘢𝘭𝘢𝘳𝘪𝘦𝘴, 𝘱𝘳𝘰𝘧𝘦𝘴𝘴𝘪𝘰𝘯𝘢𝘭 𝘧𝘦𝘦𝘴, 𝘢𝘯𝘥 𝘰𝘵𝘩𝘦𝘳 𝘤𝘰𝘮𝘱𝘦𝘯𝘴𝘢𝘵𝘪𝘰𝘯 𝘳𝘦𝘤𝘦𝘪𝘷𝘦𝘥 𝘧𝘰𝘳 𝘱𝘦𝘳𝘴𝘰𝘯𝘢𝘭 𝘴𝘦𝘳𝘷𝘪𝘤𝘦𝘴 𝘺𝘰𝘶 𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘦𝘥 𝘪𝘯 𝘢 𝘧𝘰𝘳𝘦𝘪𝘨𝘯 𝘤𝘰𝘶𝘯𝘵𝘳𝘺 𝘥𝘶𝘳𝘪𝘯𝘨 𝘵𝘩𝘦 𝘱𝘦𝘳𝘪𝘰𝘥 𝘧𝘰𝘳 𝘸𝘩𝘪𝘤𝘩 𝘺𝘰𝘶 𝘮𝘦𝘦𝘵 𝘵𝘩𝘦 𝘵𝘢𝘹 𝘩𝘰𝘮𝘦 𝘵𝘦𝘴𝘵 𝘢𝘯𝘥 𝘦𝘪𝘵𝘩𝘦𝘳 𝘵𝘩𝘦 𝘣𝘰𝘯𝘢 𝘧𝘪𝘥𝘦 𝘳𝘦𝘴𝘪𝘥𝘦𝘯𝘤𝘦 𝘵𝘦𝘴𝘵 𝘰𝘳 𝘵𝘩𝘦 𝘱𝘩𝘺𝘴𝘪𝘤𝘢𝘭 𝘱𝘳𝘦𝘴𝘦𝘯𝘤𝘦 𝘵𝘦𝘴𝘵."

More detailed information on those tests can be found on the link provided above.