Owing self-employment tax to the U.S.

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Any time. One more note: Maybe you won't have as much in your pocket after taxes, health insurance, etc., in Germany, but deciding not to work is a complex decision. Will you be bored? Will you feel devalued? Will you use this time to take up a hobby or develop a new skill? There's lots on this board on the issue of working vs. not working. Best of luck.

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For any other self-employed US citizens in Germany trying to figure out whether they need to actually pay into the German public retirement fund to receive an exemption from US self-employment tax, I'd just like to confirm once more that, by the word of the law, straightpoop is right. The relevant passage of the totalization agreement itself, Art. 6, states that "persons who have employment within the territory of one of the Contracting States shall be subject to the laws on compulsory coverage of only that Contracting State" and that the "Competent Authority (or the office designated by it) of the Contracting State from whose laws on compulsory coverage the exemption is desired may grant the exemption, if the person and his employer, or the self-employed person, will be subject to the laws on compulsory coverage of the other Contracting State." Thus, all the Deutsche Rentenversicherung confirms by issuing Vordruck D/USA 101-A is that the person in question is subject to the laws on compulsory coverage in Germany, and according to those laws, most self-employed persons are not currently required to actually pay into the system.

 

Now I just hope they send me the Vordruck quickly so I can send in my US tax returns and get on with my life :)

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If submitting a Vordruck with the federal tax return, does the return then have to be sent by post?

Or is there a way to include a note in the electronic return that you're going to be submitting additional documents separately?

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be careful, I heard ... was trademarked. Pi was just recently trademarked. You could get sued!

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I'm having difficulty understanding how to depreciate property for the US vs German tax return.

 

For example, let's assume I have a laptop computer and it's $1000 with a life of 3 years according to the German tables.

I purchase it in 04/2012, and I put it into service in 01/2013 when I move and start my business in Germany.

 

For Germany, I subtract the straight line value for 2012, and enter this as my beginning value for 2013.

$1000 / 3 years / 12 months x 9 months before start of 2013 = $250.

$1000 - 250 = $750 for 2013 beginning value.

For 2013, I have a full year deduction of $1000 / 3 years = $333.33.

For 2014 I take another $333.33 depreciation.

For 2015 I take a deprecation for the remaining value of $83.34.

 

Purchase value $1000

Starting value $750

2013 -333.33

2014 -333.33

2015 -83.34

Final 0

 

Let's say I sell the laptop in 2014. I simply deduct the entire beginning value for 2014, $416.67 in the Anlage AVEÜR in the disposal column.

I record my sale income in my turnover, and have recovered all of my purchase cost for the laptop.

 

Purchase value $1000

Starting value $750

2013 -333.33

2014 -416.67 Sold

Final 0

 

Have I done the German deductions correctly?

 

However, for the US tax return I've been reading Publication 946 and I don't understand exactly how it works.

I'm using 3rd party tax software, like Tax Cut.

Like above, if I purchased the laptop in 2012, but I put it into service in 2013, the software only asks me to enter the purchase cost for the item, without accounting for the time before I put it into service. Is this correct?

Shouldn't I be entering a lower value since it's technically used?

It then tries to give me the 200% first year Bonus depreciation, and it's a bit of work to tick off the box to get out of it.

Then it automatically selects declining rate, and I have to go in manually to select straight line.

Then it gives me a Half-year deprecation for the first year in service.

Also, computers get a 5 year life, but it's already been used for 1 year. I can't enter manually 4 years. Only 5.

 

So the end result is

 

Purchase value $1000

Starting value $1000

2013 -100

2014 -200

2015 -200

2016 -200

2017 -200

2018 -100

Final 0

 

Now, if I wanted to sell it in 2014, I only get to deduct the full year value for 2014, according to Publication 946.

So:

 

Purchase value $1000

Starting value $1000

2013 -100

2014 -200 Sold

Final unrecoverable value $700

 

Where does the $700 go?

I get taxed for the sale, but I can't recover what I lost for buying it?

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@Thomas

 

For a useful and succinct overview of the infernally complex US tax depreciation system generally: http://en.wikipedia.org/wiki/MACRS

 

In Publication 946 you will read that property used predominantly outside the US must use the ADS system. (6 year class life for computers and peripherals). If you want your TaxCut software to accurately compute your depreciation you must check the box indicating that you are using ADS and select the correct asset class. Placed in service date is what counts - not purchase date.

 

Gain or loss - and excess depreciation recapture - from the sale of an asset used in a trade or business is reported on Form 4797.

 

One good thing about having to use ADS: there should be no recapture problems because ADS by definition is the straight line, plain vanilla rate of depreciation to which depreciation under accelerated rates (MACRS/GDS) is compared for determining "excess depreciation".

 

Have fun.

 

PS.

 

No Sec. 179 deduction for assets used predominantly outside the USA.

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Thanks for the info.

 

I'm not sure what to do with low value items less than 150 EUR. In the German return, I simply entered these items into raw materials, GWG, and supplies. For the US returns, there really isn't anywhere to put them except into the depreciation.

 

Do I really have to list everything under depreciation like a computer mouse, headphones, orbital sander, sandpaper, hammer, screwdriver, power drill, camera bag, backpack, laptop bag? It would be a very long list.

 

Also, in TaxCut I wasn't able to get it to remove Schedule SE and the deduction for it on line 27 on 1040. I asked TaxCut tech support and they told me I would have to print it out and mail it in by post because E-filing won't allow me to submit electronically without Schedule SE.

 

Anyone else have this problem?

 

Is there some lady sitting at a desk who gets my tax return by post, and enters hundreds of numbers into a keyboard? She must be feeling dead inside.

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Hi Toytown, looking for an extended version of the advice already presented here.

 

I am a US citizen who is a permanent resident of Germany. I worked in Germany for ~4 years as a "normal employee" for a German company. During that time I've paid into the kraken/rentenverischerung system. I'm currently on ALG1 and may have the opportunity to take a job working "on agency" for a US company. I would work remotely from Germany and travel to the USA ~1 once a month for business.

 

The US company said they don't care if I am registered as a US business or a German one, but I have to be registered as a business/freelancer.

 

Based on what i've read here, as a freelancer, I can opt to pay into either the US or the German system (but I have to pick one).

 

So I have two questions.

1. Does it matter whether I found a US company or a German one (this determines which currency I'll be paid in, as well as where my bank account is)?

2. Is there any easy way to determine if it's better for me in the long run to pay into the US social security system or the German one? Based on what I've read about the 'windfall' provisions, it seems that having a larger US soc-sec pension is better than a larger German one.

 

Is there an easy answer here? Is anyone else in this position and has found an optimal path?

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Your situation is way too complex to rely on free anonymous advice on the Internet. Consult a qualified German tax accountant first.

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You over-estimate the complexity of tax-law and under-estimate the intelligence of your fellow TT'ers. It's very possible someone has gone through this same situation and did lots of research and has some great advice. Thanks for your super helpful post.

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@JohnM

 

Your options and the tax consequences to you in Germany and/or the US will depend in the first instance upon the nature of the independent personal services that you provide - e.g. Engineering? Market analysis? Licking envelopes and mailing letters? Translator? Software developer?, whether that service is categorizable as a "freiberufliche Tätigkeit" or a "gewerbliche Tätigkeit", and whether you are really and truly self-employed or merely "scheinselbstständig".

 

Generally speaking most (truly) self-employed persons in Germany have no legal obligation to contribute to the German social security system - but some do. Members of some professional groups in Germany also have contribution obligations to quasi-governmental retirement funds "Vorsorgungswerke" that fulfill much the same role.

 

Whether you have to actually contribute to the German SS or a professional retirement fund you are regarded as "covered" by or "subject to" the German system. Thus, under the Germany-USA Social Security Totalization treaty read in conjunction with the Internal Revenue Code, your self-employment income earned in Germany will be subject to "tax" only by the Germans regardless of the extent to which German law actually requires you to contribute or the extent to which you voluntarily contribute to that fund.

 

You can, of course, volunteer to pay into the US system by simply reporting your net SE income on your US Schedule C (Form 1040) and not claiming the benefits of the treaty on Schedule SE.

 

If you register your business in Germany and in the US then - depending upon whether the US business qualifies as a "permanent establishment" under the US-German Income tax treaty and how it is organized (C Corp, SMLLC, SCorp, sole proprietorship etc.), you might be able to allocate US-source income (attributable to services performed by and through the US PE during your temporary sojourns to the USA). This would allow you to avoid German income taxes on that part of your annual earnings subject, of course, to Progresssionsvorbehalt.

 

Your US source income will, of course, not qualify for the §911 FEIE regardless of whether you use a PE but by way of the "resourcing" clause of Article 23 of the treaty you can claim a US Foreign tax credit on those earnings if the Germans have the right to tax it under the treaty - which, of course, they would if not attributable to a US PE.

 

If you do go through the expense of setting up a US PE and the associated bookkeeping, compliance costs, contractual formalities, etc. your US source income will also be subject to US SE employment tax.

 

And don't forget: your "employer" in the US is concerned first and foremost with escaping its obligation to pay the employer's half of your US social security and medicare/medicaid contributions. It most certainly does not want to incur the obligation to pay into the German system. Consequently, they are likely to seek assurances from you that you truly are an independent contractor - both under German and US law - and that you will pick up the full contribution tab on your earnings whatever that may be in both the US and Germany.

 

Good luck.

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Does anyone know where we can obtain the D/USA 101-A in Munich. We have been trying to get the form for the past few weeks, called the Deutsche Rentenversicherung in Berlin and they reffered us to Bayern-Süd, spoke to a few people at the Bayern-Süd Rentenversicherung and no one seems to know of the existence of this form and how to obtain it. Does anybody have any advice, or had any luck getting this in Munich?

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masf, did you sign up for voluntary social security in Germany? Do you remember where? You would want to contact that Deutsche Rentenversicherung. They should have some documentation that you signed up. With that and an explanation to the IRS why you are requesting this exemption of self-employment tax. Something to consider is that if you plan on coming back to the US, by not paying the SE tax to the US, it could create a lower benefit to you when you are able to collect.

 

Kris17

 

Disclosure: I am an Enrolled Agent. An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee.

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@masf I have sent you a pm with instructions on how to apply for the D/USA 101 A

 

@Kris17 masf's self-employed husband has no need to prove contribution to the German Rentenversicherung in order to obtain a certificate of coverage (SSA 4121 or D/USA 101A). It is enough that he exercises his self-employment in Germany where he is resident within the meaning of the US-Germany Social Security Totalization Treaty. (Whether he actually has a contribution obligation will, of course, depend on what German social security law has to say about it.)

 

The US Social Security Administration's "windfall elimination" provisions to which you allude apply only when someone contributes to a "rival" social security system (e.g. the FERS in the USA or the German Rentenversicherung or auxilliary equivalent)

 

Periods of non-contribution to the US system should have no "windfall elimination" consequences so long as nothing was being contributed to a different system at the same time. In addition, even where there is actual contribution, under some circumstances the windfall elimination provisions will have no adverse consequences, e.g. when a person has substantially contributed to the US system for 30+ years.

 

Read all about it here: www.ssa.gov/pubs/EN-05-10045.pdf

 

 

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Straightpoop, can you direct me to where the self-employed don't have to prove this and also if you can guide me to this form? I know that in order to be exempt from the SE tax, there needs to be a statement. I'm all for learning more if it will help me, help other clients abroad that are self-employed.

 

Thankyou very much!

Kris17

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So I decided to take a closer look at the publication that Straightpoop provided, specifically for the Certificate of Coverage for the self-employed.

 

Certificates For Self-Employed People

 

If you are self-employed and would normally have to pay Social Security taxes to both the U.S. and German systems, you can establish your exemption from one of the taxes by writing to:

 

If you will be covered by the United States (see table above), the U.S. Social Security Administration at the address in "Certificates for employees" section above.

If you will be covered by Germany (see table above), the local German Sickness Fund that collects your German Social Security taxes.

Be sure to provide the following information in your letter:

 

Full name;

Date and place of birth;

Citizenship;

Country of permanent residence;

U.S. and/or German Social Security number;

Nature of self-employment activity;

Dates the activity was or will be performed; and

Name and address of your trade or business in both countries.

 

 

Effective Date Of Coverage Exemption

 

The certificate of coverage you receive from one country will show the effective date of your exemption from paying Social Security taxes in the other country. Generally, this will be the date you began working in the other country.

 

Certificates of coverage issued by Germany should be retained by the employer in the United States in case of an audit by the Internal Revenue Service (IRS). No copy should be sent to IRS unless specifically requested by IRS. However, a self-employed person must attach a photocopy of the certificate to his or her income tax return each year as proof of the U.S. exemption.

 

So it appears that if you need this, you have to send a letter to the local German Sickness Fund with the above information to request the D/USA 101 A. Now according to Straightpoop, a self-employed person doesn't have to prove contribution. So my question is, why would the German Sickness Fund provide this certificate if you aren't paying into social security into Germany? In order to be exempt from the SE tax for the US if you are living in a foreign country, Germany in this case, you'll have to submit this form. To me, this is providing proof that you are paying social security to one country to another.

 

Kris17

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@kris17

 

The US statutory authority for exemption from self-employment taxes is IRC §1401( c ) which reads in its entirety:

 

( c ) Relief from taxes in cases covered by certain international agreements During any period in which there is in effect an agreement entered into pursuant to section 233 of the Social Security Act with any foreign country, the self-employment income of an individual shall be exempt from the taxes imposed by this section to the extent that such self-employment income is subject under such agreement exclusively to the laws applicable to the social security system of such foreign country.

 

Please note the words: "subject . . . . . to the laws". . . .

 

The applicable clause of the US Germany Totalization Treaty is Article 6 paragraph 1 which reads in its entirety:

 

 

 

ARTICLE 6

 

 

  1. Except as otherwise provided in this Article, persons who have employment within the territory of one of the Contracting States shall be subject to the laws on compulsory coverage of only that Contracting State even when the employer is located in the territory of the other Contracting State.

 

The word "employment" includes "self-employment", i.e. where the employer and employee are the same person.

 

Note also the words "subject to the laws" - the same language used in IRC § 1401( c)

 

Consistent with the statutory language above, the certificate issued by Germany (D/USA 101 A) does NOT certify that contributions to either system were actually made. It certifies only that the conditions of Article 6 Para. 1 of the treaty quoted above have been met and that the worker is "subject only to the laws of Germany".

 

The certification printed on a recent D/USA 101 A in my file - issued by the DRV in Berlin for a self-employed US citizen resident in Germany without any German Rentenversicherung contributions - reads in two languages as follows:

 

"Der oben erwähnte Arbeitnehmer erfüllt die Voraussetzungen des Artikel 6 Abs. 1 des Abkommens und unterliegt in Bezug auf die Alters-, Hinterbliebenen-, Berufsunfähigkeits- und Erwerbsunfähigkeitsversicherung

 

von _______ bis __________ lediglich den Gesetzen der Bundesrepublik Deutschland

 

The above worker meets the conditions set forth in article 6.1 of the Agreement, and with respect to retirement, survivors and disability insurance, remains subject only to the laws of Germany.

 

beginning ________ and _________ ending"

 

(For those readers who may not be native English speakers: "subject to" is not a synonym for "paid into".)

 

Consistent with the statutory language, the Social Security Administration instructions list no requirement that the applicant even have a German social security number much less assert or prove any amount of actual contributions.

 

Also please note that according to the DRV website the application for the certification is made NOT to the Krankenkasse but to the Deutsche Rentenversicherung Nord (DRV Nord) which is the regional office that has apparently been "awarded" competency in this area.

 

The US SSA instructions are to send the form to the old Bundesversicherungsanstalt für Angestellte (BfA) in Berlin (NOT the local Krankenkasse) but either address should do the trick.

 

I invite you to share any statutory authority you may have to the contrary or even any published IRS guidance or other secondary authority that says a person must prove actual contribution to the other country's social security system before they are eligible for a certificate of coverage under Article 6 Para. 1 of the Totalization Treaty and exemption under §1401 ( c).

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@kris17

 

The US statutory authority for exemption from self-employment taxes is IRC §1401© which reads in its entirety:

 

© Relief from taxes in cases covered by certain international agreements During any period in which there is in effect an agreement entered into pursuant to section 233 of the Social Security Act with any foreign country, the self-employment income of an individual shall be exempt from the taxes imposed by this section to the extent that such self-employment income is subject under such agreement exclusively to the laws applicable to the social security system of such foreign country.

 

Please note the words: "subject . . . . . to the laws". . . .

 

The applicable clause of the US Germany Totalization Treaty is Article 6 paragraph 1 which reads in its entirety:

 

 

 

ARTICLE 6

 

 

  1. Except as otherwise provided in this Article, persons who have employment within the territory of one of the Contracting States shall be subject to the laws on compulsory coverage of only that Contracting State even when the employer is located in the territory of the other Contracting State.

 

The word "employment" includes "self-employment", i.e. where the employer and employee are the same person.

 

Note also the words "subject to the laws" - the same language used in IRC § 1401©

 

Consistent with the statutory language above, the certificate issued by Germany (D/USA 101 A) does NOT certify that contributions to either system were actually made. It certifies only that the conditions of Article 6 Para. 1 of the treaty quoted above have been met and that the worker is "subject only to the laws of Germany".

 

The certification printed on a recent D/USA 101 A in my file - issued by the DRV in Berlin for a self-employed US citizen resident in Germany without any German Rentenversicherung contributions - reads in two languages as follows:

 

"Der oben erwähnte Arbeitnehmer erfüllt die Voraussetzungen des Artikel 6 Abs. 1 des Abkommens und unterliegt in Bezug auf die Alters-, Hinterbliebenen-, Berufsunfähigkeits- und Erwerbsunfähigkeitsversicherung

 

von _______ bis __________ lediglich den Gesetzen der Bundesrepublik Deutschland

 

The above worker meets the conditions set forth in article 6.1 of the Agreement, and with respect to retirement, survivors and disability insurance, remains subject only to the laws of Germany.

 

beginning ________ and _________ ending"

 

(For those readers who may not be native English speakers: "subject to" is not a synonym for "paid into".)

 

Consistent with the statutory language, the Social Security Administration instructions list no requirement that the applicant even have a German social security number much less assert or prove any amount of actual contributions.

 

Also please note that according to the DRV website the application for the certification is made NOT to the Krankenkasse but to the Deutsche Rentenversicherung Nord (DRV Nord) which is the regional office that has apparently been "awarded" competency in this area.

 

The US SSA instructions are to send the form to the old Bundesversicherungsanstalt für Angestellte (BfA) in Berlin (NOT the local Krankenkasse) but either address should do the trick.

 

I invite you to share any statutory authority you may have to the contrary or even any published IRS guidance or other secondary authority that says a person must prove actual contribution to the other country's social security system before they are eligible for a certificate of coverage under Article 6 Para. 1 of the Totalization Treaty and exemption under §1401©.

 

 

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