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Any U.S. person who already is, or is considering working as a contractor outside of the U.S.
Understanding your tax obligations as a contractor is vital before accepting a job offer abroad. Safety in a conflict zone is priority number one. However, you want to make sure that you are fairly compensated for the risks you are taking and the tax implications are something you must be aware of before taking the job.
Apply the considerations we discuss below when weighing job offers. A higher salary as a contractor may not necessarily be better from a financial position than accepting a lower-paying job as a salaried employee. Read this guide as a tool to aid your job search and as a reference point to negotiate any potential job offers.
Can contractors utilize the Foreign Earned Income Exclusion (FEIE) to exclude up to $108K of income?
Yes, contractors can certainly qualify for the Foreign Earned Income Exclusion (FEIE). However, in general, the nature of contractor employment terms does not allow using the Bona Fide Residence Test. Therefore, civilian contractors working abroad are limited to the Physical Presence Test.
You must closely track your time spent in the U.S. (whether for personal or business reasons) in order to secure the ability to exclude up to $108K from taxable income. Depending on your home state, you may also be able to exclude your earnings at the state level.
Can contractors utilize the Foreign Housing Exclusion and Foreign Tax Credit (FTC)?
That depends on their living arrangements. If the contractor is living on employer-provided premises and does not pay out-of-pocket housing expenses, they do not qualify for the Foreign Housing Exclusion.
The Foreign Tax Credit (FTC) allows U.S citizens abroad to utilize any tax paid to a foreign government towards their U.S. tax obligations. However, contractors almost never pay tax in the country of foreign employment, thus they do not have the ability to utilize the Foreign Tax Credit (FTC) mechanism to reduce tax on earnings remaining after exclusion of the first $108K.
Yes. Beginning tax year 2018, contractors and employees of contractors supporting the U.S. Armed Forces in designated combat zones may now qualify for the Foreign Earned Income Exclusion (FEIE). To claim the Foreign Earned Income Exclusion, you must meet the Bona Fide Residence Test or the Physical Presence Test.
The Bipartisan Budget Act of 2018 changed the tax home requirement for eligible taxpayers, allowing them to claim the Foreign Earned Income Exclusion even if their "abode" is in the United States.
The biggest, most often ignored, and most expensive issue for contractors is that they must always file a State Tax Return unless their home of record is in a tax-free U.S. state. Civilian contractors always file as full-year residents of the state that is indicated as their home of record on Form W-2.
Civilian contractors with compensation reported on Form 1099-Misc (independent contractors) are also obligated to file a state return, even if the home of record is not shown on Form 1099-Misc. Most often this is the state where their family (spouse and children) remained. If single, they file a state return with the state where they lived and filed prior to working overseas.
What are the tax deadlines for contractors? What if I work in a combat zone - do I get an automatic extension?
Even when working in a war zone, you are still subject to normal tax filing deadlines. If you are abroad on April 15, you have an automatic 2-month extension until June 15. Similarly, the FBAR is due April 15 with an automatic extension until October 15.
Civilian contractors working in direct support of military operations in designated combat zones can take advantage of a penalty waiver. If qualified, one can obtain an extension of time to pay federal taxes for the period of service in the combat zone, plus 180 days after their last day in the combat zone. If you have outstanding tax due (any tax due is owed by Apr 15; interest accrues from then on) - we can file for a penalty waiver to have this removed.
You may be able to use partial Foreign Earned Income Exclusion if you had 12 consecutive months overlapping two years where you met the 330 days abroad requirement for the Physical Presence Test. If a consecutive 12-month period cannot be established then you will not be able to use the Foreign Earned Income Exclusion. Months spent in the U.S. on job-related training cannot be included in the selected 12 months period.
You have the right to file jointly (MFJ) or separately (MFS). Even if you file separately (MFS) hoping to utilize the Earned Income Credit (EIC), this will not work because the MFS status does not allow the use of the Earned Income Credit. Your spouse cannot use the Head of Household status as long as you are officially married and not legally separated. Moreover, if your spouse lives in a community property state like California, half of your income will be counted as her income. For the majority of taxpayers, the overall family economic benefit will be higher if they file jointly.
My contract ended early because of a job-related injury. I had to return to the U.S. after 10 months abroad to get treatment in a hospital. Can I claim partial foreign earned income exclusion based on the qualifying life event?
The minimum time requirement can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. Unfortunately, any other unexpected events including family or health-related issues do not qualify for the time requirement waiver.