1099-Misc: Schedule C or Foreign income, or both?

Vince75 · Post by **Vince75** » Sat Feb 06, 2016 10:24 am

Hello everyone,

My wife worked for 2 month as a freelancer in 2015 (making 10K$US) and got an 1099-Misc for it.

How should be report it? On Schedule C and Foreign Income or only on foreign income? I assume the main diff will be the SSA tax? We have to report this income in Canada as well and assume that she will pay canadian SS on it, right? So she should not pay it in the US? Do you confirm we need a certificate?

I would have many many more questions : ) by the way, do you know the fees charged by Serbinski for a pretty straigh forward report (W2, 1099-Misc and Form 1116?).

Thanks,
vincent

Steve15 · Post by **Steve15** » Sat Feb 06, 2016 3:42 pm

Itâ€™s not quite clear by your post, but I assume you are a Canadian resident. If so, you can use the treaty to exempt this business income in the US and only pay tax on it in Canada. This is because you were physically in the US for less than 183 days earning this income.

This income would be reported on a T2125 on the Canadian side and you would pay 9.9% for Canada Pension Plan (CPP) on the NET amount over $3500. By net amount I mean net of business expenses, if you had any. Because you are self-employed you do not pay any employment insurance (EI) on this income.

Hope this helps.

Vince75 · Post by **Vince75** » Sat Feb 06, 2016 9:04 pm

Thanks for your reply. We actually moved in Canada from the U.S. In June last year, my wife is a U.S. Citizen and I am personally a green card holder, hence my question regarding US tax report.

Steve15 · Post by **Steve15** » Sun Feb 07, 2016 12:06 pm

Yeah if your wife is a US citizen you obviously will not be able to exempt this income on the US side via treaty. This only works if you are a Canadian resident and not a US resident for tax purposes.

You will file a part-year return on the Canadian side, with some credits being prorated because you were not there the full year. You will only have to report the $10K in Canada on the T2125 (as described earlier) and pay CPP if this income was earned AFTER you came to Canada. You are taxed on worldwide income after your arrival, but only Canadian source income before hand. Was it earned before of after the move?

Also, if you have any assets, some of them may be deemed to be sold and reacquired giving you a new starting point for taxation on the Canadian side for these.

Vince75 · Post by **Vince75** » Sun Feb 07, 2016 5:00 pm

Those was earned in Canada. But I should be able to claim Foreign tax credit on those correct?

She is going to work full time for this company in 2016, and they are going to report her income as a contractor, with 1099-Misc. need to find the right set up tax wise for her....

Steve15 · Post by **Steve15** » Mon Feb 08, 2016 10:00 am

Yes correct, you will be able to claim a foreign tax credit for this on the Canadian side; including any FICA she pays on this (SS etc). I'm not entirely sure how best to handle this on the US side, most of my experience is on the Canadian side.

Because of the totalization agreement between Canada and the US, I believe there is a way to only pay SS in either Canada or the US (not both), I'm just not entirely sure how this works. Perhaps Nelsona can help you with this aspect.

From reading some of Nelsona's previous posts, it's normally best to be a contractor, so sounds like she is in a good spot.

So in summary, because she is a US taxpayer (my terminology as a US resident in the last post was poor - she is a US taxpayer because of her citizenship not her residency) she will pay tax on the $10K in the US, they may or may not charge her FICA (hopefully Nelsona can clear this up), then you report it on the Canadian side (as described earlier) and claim a foreign tax credit for this income on the Canadian side. Canada will charge her the 9.9% CPP on Schedule 8 of her tax return.

Also, just to clarify about the deemed disposition on your assets when moving to Canada. In general, the US does not deem them to be exposed and no tax will be paid on them. Canada just "bumps-up" the ACB (cost) on the assets to the current market value on the day you arrived. This way you are only taxed on any future growth from the day of your arrival. Not sure if this is applicable to you, but thought I would mention it.

nelsona · Post by **nelsona** » Mon Feb 08, 2016 10:48 am

Steve is incorrect on how the foreign tax credit will work.

Canada does NOT give credit for US tax arising only because you are US citizen. A non-USC residing in Canada would not pay US tax on this contractor income, thus Canada gives no credit.

And, no, you should not pay SE tax on this income either, by the totalization agreement. You may have state tax to pay however (check with the state you worked in), and THIS will be credited on your Cdn return.

The double tax relief comes from the IRS, by the "re-sourcing" of the US contractor income as Cdn, on a 1116 form.
This methodology was recently explained in this thread:

http://forums.serbinski.com/viewtopic.php?t=10463

For Cdns, this 're-sourcing" commonly applies to income which is not taxable to Cdns by treaty or IRS reg: non-resident contractor income, wages less than $10K in a calendar year, US bank interest, some capital gains. Also, US dividends and royalty income on which you paid more than 15%.

There is a worksheet in the IRS foreign tax crdit guide which goes thru the steps.

Steve15 · Post by **Steve15** » Mon Feb 08, 2016 12:04 pm

Thanks for correcting me on this Nelsona!! I was aware of the resourcing rules for wages and dividends, but did not know this applied to contractor income as well. But now that I think about it, it makes perfect sense.

Are the re-sourcing rules applicable to Greencard holders as well?

nelsona · Post by **nelsona** » Mon Feb 08, 2016 2:47 pm

In almost all treaty items related to US citizens, one can assume "US citizen and one admitted for US permanent residency"

Vince75 · Post by **Vince75** » Mon Feb 08, 2016 5:51 pm

Thanks to the both of you. I will review carefully all the info provided by Nelson.

Nelson, do you work for Serbinski? If yes, do you have any idea of their fees for doing both filing? US and Canada?

Best regards,
Vincent

nelsona · Post by **nelsona** » Mon Feb 08, 2016 9:15 pm

my signature says it all.

Vince75 · Post by **Vince75** » Wed Feb 10, 2016 1:20 am

Well, I appreciate you answering all those questions for the beauty of it :)

I admit, I was close to give up and go to a CPA for doing this for me, but I will give it a last shot. I am working on both my taxes on Turbotax (.com and .ca), and I have few very basic questions for you:

- we left the US in June, and moved to Quebec (Green card holder and wife is a USC).
- I was a full time employee in the US, my wife did not work. So I have a W2 covering my time in the US for 2015.
- here, I am a full time employee of a canadian company and my wife did some freelancing for a US comp. I have T1/T4 and my wife was issued a 1099-Misc by the Us company she worked for, from Canada.

On my US Tax filling:

- My income are reported on form 1040 via my W2 and my foreign earn income as well. I will use the annual average exchange rate published by the IRS.
- I have more difficulties with my wife 1099-Misc. Do I need to report it only as a foreign earn income (like my canadian income), or as well on the Schedule C?
- We do not qualify for bona fide residence etc (so no 2555 form), so we are going to claim a foreign tax credit (form 1116). I assume I need to report as taxes paid here in Canada all taxes we paid minus any potential refund we get from cnd, right?

Just make sure I understand at least the basics :)

Thanks again.

nelsona · Post by **nelsona** » Wed Feb 10, 2016 8:05 am

It is self-employed income and should report it as such; she needs to file with Canada to get exempted from SE tax. It is a letter of compliance.

You can use 2555 once you are way for a year under PPT . You file an extension and then file in june when you have been out of US for 330 days.