VERONICA TUBMAN : OK, it's the top of the hour. So, let's get started. Welcome to our IRS presentation, U.S. Territories Self-employment Tax. We're glad you're joining us today. My name is Veronica Tubman and I am Stakeholder Liaison with the Internal Revenue Service, and I will be your moderator for today's webinar, which is slated for a hundred minutes. Before we begin, if we have anyone in the audience with the media, please send us an email message to the address provided on this particular slide. Include your contact information and the news publication you're with. Our Media Relations or Stakeholder Liaison staff can assist and they'll answer any questions that you may have. As a reminder, this webinar will be recorded and posted to the IRS Video Portal in a few weeks. We'll post it to www.irsvideos.gov If you have a technology issue during the webinar, this slide shows some helpful tips and reminders. We've posted a technical help document you can download from the materials button and it's right there on the left side of your screen, and it provides the minimum system requirements for viewing this broadcast along with some best practices and quick solutions. And if you completed and passed your system check and still have problems, well, then go right ahead and try one of the following. One option is to close the screen where you're viewing the webinar and just go ahead and re-launch it. The second option is to click the gear icon. You may or may not see the icon. It depends on your particular browser. If you have it, it will be in the right corner of the slide and photo boxes. You'll be given two choices Select Flash instead of HLS from the available media box. If you do not have the gear icon and re-launching your viewing screen doesn't fix your problem, well, try using a different browser to launch and view the webinar. You may also want to close all the windows and apps you have on your viewing device, just to make sure. We hope you received the PDF version of the PowerPoint and Forms 1040-PR and 1040-SS in a reminder email, but if you didn't, you can go right ahead and download them by clicking on the materials button on the left side of your screen. Closed captioning is available for today's presentation. If you're having trouble hearing the audio through the computer speakers, please click the CC button on the left side of your screen as shown. This feature will be available throughout today's broadcast.

So, during the presentation, we'll take a few breaks to share knowledge-based questions with you.

At those times, a polling style feature will pop right up on your screen with a question and multiple-choice answers. Don't forget, select the response you believe is correct by clicking on the radio button right next to your selection and then just go ahead and click submit. If you do not get the pop-up box for responding, please enter your response timely in the Ask a Question feature, so we can track your participation. If you have a topic-specific question today, please submit it by clicking on the Ask a Question button, enter your question in the text box and go right ahead and click submit. Please, please I cannot emphasize this enough--do not enter any sensitive or taxpayer-specific information and we appreciate that. We ask that you wait for your specific topic to be addressed before submitting your question, because the answer may be covered in the materials that we go over today. Now, moving right along with our session, let me introduce today's speaker. Our speakers for today's session are Bethany Krause and Tracy McFee.

They're Senior Revenue Agents in the withholding and international individual compliance area for the Large Business and International Division. As technical specialists, they both facilitate and coordinate the identification, development, and resolution of international issues. Both have expertise with tax issues of non-resident aliens and U.S. citizens working abroad. And with that being said, I'm going to turn it over to Tracy to begin the presentation. Tracy? TRACY MCFEE : Thank you, Veronica. Let me add my welcome to you all for--and your thanks for attending today's webinar session. During today's webinar, we'll cover the following. First of all, we're going to define self-employment. We'll talk about how to calculate net self-employment income for U.S. self-employment tax purposes. We will illustrate how residents of U.S.

Territories report self-employment tax by going through four examples, and we'll also discuss the penalties that may apply for failing to timely report and pay self-employment tax. U.S.

Territories have separate autonomous income tax systems, but they do not have their own separate systems for Social Security purposes. The IRS is responsible for ensuring that self-employed individuals who live and work in U.S. Territories, and by U.S. Territories I'm referring to American Samoa, Guam, Puerto Rico, the Commonwealth of Northern Mariana Islands, or the U.S.

Virgin Islands. So, the IRS is responsible for ensuring that bona fide residents of these territories comply with their requirements for paying self-employment tax. So, if you live or work in a U.S. Territory and have net earnings from self-employment of $400 or more, then you generally must report and pay self-employment tax to the IRS. Do not report your self-employment tax or submit self-employment tax payments to your local U.S. Territory tax authority. This requirement will apply whether or not you are required filed an income tax return with the IRS.

The only exception is if you are a non-resident of the United States and are also not a resident American Samoa, Guam, Puerto Rico, the Commonwealth of Northern Mariana Islands, or the U.S. Virgin Islands. So if--unless you are--you--if you're a--anyone other than a non-resident alien of the United States who is also not a resident of one of the Territories, you are going to be required to pay--report and pay self-employment tax to the IRS if your net earnings from self-employment is $400 or more. Employees have taxes withheld from their paychecks by their employer, so some of you who may have worked as employees would be familiar with that. However, when you have income that is not subject to withholding, you need to make estimated tax payments during the year. If you've worked as an employee, you may not have really thought about Social Security and Medicare Taxes that are withheld from your pay. But as a self-employed individual, you are the one who has to pay these taxes yourself. Which form you file to report and pay your self-employment tax as a resident of a U.S. Territory will depend on whether or not you're required to file a U.S. income tax return. If you're not required to file a U.S. income tax return, you would file Form 1040-SS or Form 1040-PR, which is the Spanish version, with the IRS to report and pay your self-employment tax. If you're required to file a U.S. income tax return, then you would file Form 1040 Schedule SE with your U.S. income tax return to report and pay your self-employment tax. Now, some of you may be wondering how to determine whether or not you have a requirement to file a U.S. income tax return as a resident of a U.S. Territory. Well, that depends on several factors including whether you are a bona fide resident of the U.S. Territory under the rules set forth in Internal Revenue Code Section 937, and it will also depend on which Territory, American Samoa, Guam, Puerto Rico, CNMI or the Commonwealth of Northern Mariana Islands or the USVI, the U.S. Virgin Islands that you're a resident of. If you're not a bona fide resident alien--a bona fide resident, I'm sorry, of a U.S. Territory, whether you are a U.S. citizen, U.S. resident alien, or a non-resident alien, so it's also going to depend on your residency status for U.S. tax purposes and whether you're a bona fide resident of a U.S. Territory and whether you're a U.S. citizen, a U.S. resident alien or non-resident alien. And then the next thing you have to consider is if you have the income from sources outside the relevant Territory. And finally, whether you received income for services as an employee of the U.S. government. All these factors can impact whether or not you have to file a U.S. income tax return. Unfortunately, we don't have the time available today to discuss the specific income tax filing requirements for individuals with income sourced within a U.S. Territory during today's webinar. If you need more information on this topic, you can refer to IRS Publication 570, which is titled Tax Guide for Individuals with Income from U.S.

Possessions, or contact the specific Territory's tax department. Next, Bethany is going to talk about how--about individuals who are self-employed. Bethany? BETHANY KRAUSE: Thank you, Tracy. You are self-employed if you are a sole proprietor and that means owning your own business or it also includes meaning if you are an independent contractor, if you are a sole member of a Limited Liability Company or an LLC that is disregarded for federal income tax purposes, or if you're a member of a qualified joint venture. The term self-employed also applies if you are a partner in a partnership including a member of a multi-member LLC that's elected to be treated as a partnership for federal tax purposes or otherwise engage in business in a capacity other than as an employee. An individual who doesn't have to carry on regular full-time--an individual does not have to carry on regular full-time business activities to be considered self-employed. So, if you have a part-time business in addition to your regular day job where you're an employee, if you're operating a business on the side, working on the side as an independent contractor or operating a seasonal business, that also counts as self-employment.

Later in this presentation, we're going to go over some examples to show you how four fictional individuals would report their self-employment tax using the 2016 version of the Form 1040-SS U.S. Employment Tax Return. And those examples will include why an individual who has a side job in the sharing economy. When we use the term sharing economy, we're talking about someone who uses one of the many online platforms or apps that are available out there to provide car rides or to connect and provide a number of other goods or services. Another example we'll talk about later in more detail is J, who's a computer programmer by day and repairs computers on the side. Another one is S, who operates two businesses as a sole proprietor, a restaurant and a farm. And L, who is a self-employed attorney. So later in the presentation, we'll be going over each one of these fictional examples and actually show you how they would fill out the Form 1040-SS to compute their employment--their self-employment tax. But first, Tracy is going to define net self-employment income and explain how to compute self-employment tax. Tracy?

MCFEE: Thank you, Bethany. And Bethany's already talked about--talked about who is self-employed, so let's talk about self-employment income. Self-employment income includes gross income including any tips you may have received from a trade or business less any allowable deductions attributable to that trade or business. It also includes a general partner's distributive share whether or not it's actually distributed of income or loss from any trade or business carried on by a partnership, excluding rental, dividends, interests, and capital gain or loss. It also includes payments received by a partner of a partnership for services rendered to the partnership and those are commonly referred to as guaranteed payments to partners. It also includes fees for services you provide as an--well, no, let's back up a second. It does not include fees for services you provide as a notary public. That's not considered self-employment income for self-employment tax purposes. It's not subject to self-employment tax. However, all of your other self-employment income will be subject to self-employment tax. So here on this slide, we have an example. L is a self-employed attorney and a notary public. So he works both as an attorney and provides notary services. Only the income that L received for services performed as a notary is not subject to self-employment tax. So the notary services income is not going to be subject to self-employment tax. Any other income that he receives for work he does as a lawyer will be subject to self-employment tax. And later in today's presentation, Bethany will walk you through how L will--would calculate and report her net self-employment income. The U.S. Territories of Guam and Puerto Rico are community property jurisdiction. If an individual and his or her spouse only own an unincorporated business as community property and only one spouse participates in the business, all the income from that business is the self-employment income of that spouse, that one who's participating in that business. On the other hand, if both spouses participate in the business, in a common law--or community property jurisdiction, so if both spouses are participating in a business and that business is in Guam or Puerto Rico then the income and deductions are allocated to each spouse based on their respective distributive shares. So, in that case, each spouse would be responsible for paying self-employment tax and reporting that to the IRS. So next we're going to talk about, um, the -- sorry. Next, we're going to talk about where it's reported. So, as I mentioned earlier, the form 1040-SS which is the U.S. Self-Employment Tax Return or the 1040-PR which is the Spanish version of the form is used to report and pay self-employment tax. And what does and does not make up self-employment income is discussed in greater depth in the instructions for the form 1040-SS and the form 1040-PR. So, Veronica, I think this is a good point for us to stop for our first polling question. TUBMAN: I totally agree. Thanks Tracy. All right. Now, our first polling question is, a self-employed attorney who receive fees for both legal services and notary public services is subject to self-employment tax on A--so what we need to--before I read those, just take a minute and click on the radio button you believe most closely answers the question. Now, this is based on the information that Tracy just shared. So do you think the correct answer is A, fees for legal services only. B, fees for both legal services and notary public services or C, fees for notary public services only. So just take a few more seconds to make your selection now. Just remember the information that Tracy just shared with us. OK, we're going to stop the polling now. And we'll share the correct answer on the next slide. And the correct answer is A, fees for legal services only. So let's see what the percentage is, 84 percent of you responded correctly. Way to go. That's a great response rate but we're going to--if need be, do--you have your PowerPoint presentation, you can go back and review the information again which is good. OK Tracy, I'm going to turn it back to you. MCFee: Thanks Veronica. OK. So how is net self-employment income calculated for self-employment tax purposes when you're a resident of the U.S. Territory? Net self-employment income will generally be computed the same way for Territory income tax purposes as it is for U.S. self-employment tax purposes. And you can refer to the instructions for 1040-SS, the U.S. self-employment tax return or if Spanish version 1040-PR for more information about the expenses that are allowed in determining net income from self-employment for U.S. self-employment tax purposes. However, I do want to mention that some operating expenses that may be deductible on returns filed with Puerto Rico's tax agency may not be allowable in computing net income for U.S. self-employment tax purposes. For example, the Puerto Rico return may allow the deduction of one half of the self-employment tax, it may also allow deduction for self-employed health insurance and contributions for the self-employed employee pension or SEP, planned and business operating expenses. So although these expenses are allowed as adjustments to gross income on the U.S. Form 1040, they are not deductible when computing net self-employment income on Schedule C or F of a U.S. form 1040 income tax return.

So they generally would not be allowed in figuring your net income subject to self-employment tax if you are a bona fide resident of Puerto Rico and you were reporting those on your Puerto Rico tax return--in Puerto Rico income tax return. So, again, I'm going to refer you to the instructions for from 1040-PR which is in Spanish or form 1040-SS which is in English. If you have questions about what expenses would be allowable in computing your net self-employment income. Self-employed individuals in addition to being liable for self-employment tax may also be liable for Additional Medicare Tax. If your self-employment income exceeds the threshold amount for each taxable year as shown on Form 8959 in its instruction. If you're required to pay Additional Medicare Tax on your self-employed net income, you're going to need to attach a Form 8959, the Form 1040, if you have to file an income tax return with the IRS, Form 1040-SS or Form 1040-PR whichever apply. I also want to note that you cannot include the Additional Medicare Tax as part of your deduction for one half as self-employment tax on f=Form 1040, the U.S. income tax return. Your payments of self-employment tax contribute to your coverage under the U.S. Social Security System. So this is the big benefit of, of having to pay self-employment taxes that you will get--you will--they will help you be eligible for coverage under the Social Security System. Social Security coverage provides you with old age, survivor, and disability benefits and hospital insurance. The Social Security Administration will use the information from Form 1040-SS or Form 1040-PR or the self-employment tax schedule if you're required to file a form 1040 with the IRS. They use that information to compute your benefits under the Social Security program. So I know that we've said this several times but it is--it is really important for you to remember, if you have self-employment income and you're subject to s self-employment tax and you're a resident of the U.S. Territory, you must file and send your self-employment tax payments to the IRS. If you have any U.S. source income such as Social Security benefits, please see Publication 570 which is the tax guide for individuals with income from U.S. possessions and you can also refer to Publication 1321 which is the special instructions for bona fide residents of Puerto Rico who must file a U.S. income tax return Form 1040 if that applies to you for more information about reporting your self-employment tax. If you have a requirement to file an income tax return with the Internal Revenue Service, so if you're required to file a Form 1040 with the IRS you would use Schedule SE and submit it to the IRS with your Form 1040 to report and pay self-employment tax. Otherwise, if you're not required to file an income tax return with the IRS you would use Form 1040-SS, the English version or Form 1040-PR the Spanish version and you would file that with the IRS at the address that's shown in the instructions to the form to report and pay your self-employment tax. Do not file Form 1040-SS or Form 1040-PR with the Form 1040. If you're using the Form 1040 to file with the IRS, then you would use Schedule SE. If you're not required to use Form 1040 to file with the IRS, then you would use Form 1040-SS or Form 1040-PR if you're liable for self-employment tax and you're a bona fide resident of the U.S. Territory. Do not submit your self-employment tax form either your Form 1040-SS, 1040-PR or your self-employment tax payments to your local U.S. Territory tax authority. Veronica, I don't know about you, but I think it's time for another polling question.

TUBMAN: I agree with you Tracy, that was really good information. OK audience, are you ready?

Our second polling question is: who do you file your self-employment tax forms is? So, is it A, your local U.S. Territory tax agency or B, the Internal Revenue Service? So, take a minute and click in the radio button you believe closely answers this question based on the information that Tracy just shared with us, what do you think the correct answer is. And I'll give you a few more seconds to make your selection. OK. Here we go. We're going to stop the polling now and we'll share the correct answer on the next slide. And the correct response is B. The correct response is B. Who do you file your self-employment tax forms with? And that's with the Internal Revenue Service. And I see that 94 percent of you responded correctly. Way to go, that's a great response rate. OK. I'm going to turn it over to Bethany and she's going to go over some examples. So, Bethany, it's all yours. KRAUSE : Thank you Veronica . OK. Now that Tracy defined that self-employment income and she also explained which form to file and where to send it, let's look at some examples that illustrate this. Our first example has to do with Y who has a fulltime job at a bank. In the evenings and on her days off Y uses her car to provide rides to customers arranged through an app on her smartphone. The rideshare company that runs the app receives the payments from the customers then they deduct a service fee and then they pay Y her share of the ride payment. Most customers add the tip to their credit card payment but sometimes Y receives cash tips from customers. During 2016 Y made rideshare payments, net of the service fee, that came to $8,600. She also received cash tips during that year that totaled $200. Her deductible business expenses were $3,700. So she has to pay U.S. self-employment tax on her net profit which $5,100. So, to do this, why complete Form 1040-SS or 1040-PR? And I want to stop for one minute, there were questions that I saw about that. Someone was asking, are those forms interchangeable? Are they the same? Yes, they are. The 1040-SS is the English version of the 1040-PR or vice versa. So, these are the same form, one is in English, the 1040-SS and then 1040-PR is in Spanish. So other than that, there is no difference between these. Y completes Form 1040-SS or PR and she reports on their her net self-employment income of $5,100. In Part 5 of the form she would compute self-employment tax by taking her net self-employment income of $5,100 and multiplying it by 92.35 percent or 0.9235. The result is $4,709.85. Now we have to think about this, her earnings from her day job at the bank, what are those? Well those are $37,000. So, she will subtract that as you can here on the form, she subtracts the $37,000 from $118,500 and that number $118,500 is pre-populated on the form for you, it's already there. And that is the maximum amount of earnings on which Social Security could be withheld in 2016 and I want to mention that the maximum amount for 2019 is going to be $132,900. For 2018 it was $128,400 and for 2017 it was $127,200. And as far as we know that would be the only difference in this form between those years and this year would be the maximum amount of earnings on which Social Security is able to be withheld. So, on 2016 it was $118,500, she subtracts the $37,000 from her day job and the result is $81,500. So, then she takes the lesser of that or the amount that appears on--she takes the lesser line 6 or 9. So, the amount that we talked about earlier where she took the $5,100 multiplied it by 92.35 percent and arrived at $4,709.85. So, she takes that amount now because that's the lesser of the two, the lesser of the $81,500 or the $4,709.85 and she multiplies that by 12.4 percent or 0.124 and that results in a Social Security tax of $584.02. Now her next step is to multiply the $4,209.85 by 2.9 percent or 0.029 which equals $136.58 in Medicare tax. So, her self-employment tax totals the Social Security and the Medicare put together totals $720.60. And, of course, some people around and that's perfectly acceptable, so these could have been round numbers but for some reason we ended up putting decimal points in. Let's look at another example J works fulltime as a computer programmer for a software company and then he repairs and installs software on people's computers on the side. So, his day job he makes $155,000 a year, and his employer, of course, withholds income employment taxes on net income and then he has his side job, repairing and installing software for customers. In 2016 he made $8,000 from this side business, that was his gross receipts from the side business.

He also incurred some deductible business expenses, $1,600 for supplies and software directly related to this side business. The income of $8,000 that he earned in his side business is taxable and it's reported on his Territory tax return as business gross receipts and then, of course, he takes his expenses. So, his net profit from the side business is $6,400 and he has to file Form 1040-SS or 1040-PR with the Internal Revenue Service and report this self-employment income and pay self-employment tax. J reports his net self-employment income in Part 4 of the form and now in Part 5 he computes his self-employment tax. First, he takes his net self-employment income of $6,400 and multiplies that by 92.35 percent. The result is $5,910.40.

As I mentioned earlier, he made $155,000 on his day job and his employer withheld Social Security and Medicare Tax from that. Since $118,500 was the maximum amount of earnings and with Social Security Tax could be withheld at 2016, he doesn't owe any Social Security Tax on this additional self-employment net income. There's no cap or limit however on how much an individual has to pay Medicare. So on line 11 J multiplies the $5,910.40 of net self-employment income by 2.9 percent and he arrives at $171.40 in Medicare Tax and that's what he would need to send in with his Form 1040-SS to the IRS. OK Tracy, can you go over our next example? involves a sole proprietor with two businesses. S owns and MCPHEE : Sure Bethany, I'd be glad to. This next example involves a sole proprietor with two businesses. S owns and operates both a restaurant and a farm. In 2016, his restaurant business had gross receipts of $150,000 as shown here on the slide and business expenses which is in the bottom of the slide of $78,000. His farm has gross receipts of $5,000 and business expenses of $6,000. So, let me go ahead and figure out what his net self-employment income is, so that's the next step. So, as you can see here in the first column, his restaurant business brought in $150,000 in gross income and his expenses were $78,000. So that resulted in a net profit of $72,000 from the restaurant. His farming business unfortunately did not do as well. In 2016 his farm which in the past had always been profitable brought in only $5,000, although his expenses were $6,000. So the farm had a net loss in 2016 of $1,000. Since S has more than one business that he operates as his sole proprietor, he must combine the net profit loss from both businesses to determine his total earnings subject to self-employment tax. The loss from his farming business reduces the profit from his restaurant business for self-employment tax purposes. So his net business income subject to self-employment tax is $71,000. The $72,000 net profit from the restaurant business less the $1,000 net loss from the farming business for tax 2016. Even though he has two businesses S will only file one Form 1040-SS to report his income from self-employment tax to the IRS and will figure and will use that one form to figure the correct amount of his self-employment tax. S will report his business income and expenses or the farm in Part 3 which is the profit or loss from farming schedule of Form 1040-SS. He will report his business income and expenses for the restaurant in the Form 1040-SS Part 4 which is profit or loss from business for sole proprietors. So now let's look at the portion of the form that shows how the amount of s self-employment tax will be computed for this example involving S. So, we're going to look at Part 5 of the form, that's where the self-employment tax is computed. On Line 1A which is net farm profit or loss, S will report the $1,000 loss from his farming business. So, Line 1A is for farming activity. Line 1A is only used for farms, so he does not show his profit from his business on this line. Instead, Line 2 is used to report net profit or loss from a non-farm business. So this is the line that where S will report the $72,000 profit from his restaurant business. He'll then combine the $1,000 loss from his farming business shown on Line 1A and the $72,000 profit from his restaurant business shown on Line 2 and then will enter that total $71,000 on Line 3 of the Form 1040-SS Part 5. Next, S will take his net self-employment income of $71,000 and multiply it by 92.35 percent or as Bethany said earlier, it's 0.9235 and the result is $65,568.50 and some people have noted we have rounded that--and we have--we have shown that to the cent. Normally you can round that to the dollar and that's acceptable. So, the $65,568.50 is reported on Line 4A and then it's carried to Line 4C since S was not eligible to elect and did not elect to use an optional method to figure his self-employment tax. So please note that we don't have time to discuss the optional methods for figuring self-employment tax today and if you need more information about the optional method, you can see the instructions for the Form 1040-SS or the Form 1040-PR. OK. So, we're going to continue on with Part 5 of the form. Since Lines 5A and 5B do not apply to S, he's going to enter the total from Line 4C which is $65,568.50 that was on the prior slide, going to enter that on Line 6. Lines 8A through 8C also do not apply to S. So, he's going to enter 0 on Line 8D and bring the $65,568.50 amount down to Line 9. Next, he's going to take the lesser of Line 6 or Line 9, in this case, both amounts are the same, so he's going to enter $65,568.50 and he's going to take that and multiply this by 12.4 percent which will result in a Social Security tax of $8,130.49. Next, he will multiply the $65,568.50 by 2.9 percent which equals $1,901.49. So he will add the $8,130.49 and then he will add to that the $1,901.49 which is the Medicare portion, so the Social Security portion and the Medicare portion and you would arrive at as self-employment tax liability of $10,031.98 as shown here on Line 12.

OK, Bethany , we have one more example. Can you go through that with our audience? KRAUSE : Certainly, Tracy. I would be happy to. And before I do, I just want to mention I am scrolling through some of the questions that folks have been sending in. And there seems to be, um, perhaps some confusion about why, for example, in the first example or in all of these examples I suppose, that they were asking about the first one. But why this individual is not using a Schedule C or a Schedule SE, and she's using the 1040-SS? And the reason for that is that these individuals in these examples are bona fide residents of U.S. Territories. And that is why these individuals, I guess it's an assumption here is that, well, the whole webinar is pretty much directed to people who are living and working in a Territory. The majority of them will be bona-fide residents there, and they would have a filing requirement with the Territory. So, in our examples these individuals are bona fide residents of the territories and have their primary filing requirement there for their income tax. They are just picking up the Social Security Medicare piece of it and reporting that to the IRS because that's the self-employment tax piece.

And that's why in these examples they are using a 1040-SS, which, again, is the equivalent of a 1040-PR. And I hope that that helps to explain some of those questions that are coming in. And I am sorry if we didn't make that clearer. At the beginning of the examples these individuals are bona-fide residents of the U.S. Territories. So, moving on to this fourth example, L is a self-employed attorney. She provides both legal and notary services. In 2016 she earned $95,000 for her legal services and another $5,000 for her notary services. She reported a total of $17,000 in business expenses on her Territory income tax return, which included $300 of expenses related to the notary income. And it also included $7,000 that she was paid--she paid for health insurance for herself. OK, you can see that the first column here kind of recaps what was just discussed on the last slide. And the second column shows what should be reported on her Form 1040-SS, or 1040-PR. And I wanted to point out that although she included the $7,000 that she paid for her health insurance, in the business expenses that she reported on her Territory tax return, that expense is not deductible when computing net self-employment income for purposes of U.S. self-employment tax. So, there's going to be a difference there in the net income reportable to the Territory versus the net income that she is reporting to IRS for Social Security Tax. As I mentioned on the previous slide the $10,000 of business expenses, which was separate from the $7,000 that she paid for the health insurance. So, the remaining $10,000 included $300 related to her income for notary services. So, her net income from notary services was $5,000 minus $300 or $4,700. Self-employment tax is not imposed on her net income from notary services, so the $4,700 in net income from notary services is backed out for purposes of U.S. self-Employment Tax, which brings the amount subject to U.S. self-employment tax to $85,300. L uses Form 1040-SS or PR to report her income from self-employment tax to the IRS. And we can look here at how she is going to do that. So, first, we are going to look at how that amount is computed here on part five of the form. She enters $90,000 as self-employment income on line two of part five. And then on line three, following the instructions for this form she backs out the $4,700 of net income from her notary services. And I'm sorry, it should be $95,000 and she backs up with $4,700, which is, as you recall was the $5,000 in notary income minus the $300 of expenses related to the notary income. And she writes exempt, notary $4,700 on a dotted line next to line three. She enters her net income from self-employment and then completes the rest of the form, multiplying that by 92.35 percent. And in this particular screenshot she writes, "At an amount of $78,774.55." Since that is less than $118,500, it is multiplied by 12.4 percent, which results in $9,768.04 in Social Security taxes due. And then following along with the form sheet and multiplies it by 2.9 percent to arrive at $2,284.46 in Medicare Tax. So as you can see here the total self-employment tax that she has to pay is $12,052.50. OK, now that we have gone over how to complete these forms let's talk about the due date for filing them. Forms 1040-SS and 1040-PR are due by the 15th day of the fourth month after the close of the taxable year, which is a long way of saying that for most people, if you are calendar year taxpayer it's generally due April 15th. All payments have to be made on or before that due date. If you can't file on time, then it's important before the due date or no later than on the due date to use Form 4868 Application for Automatic Extension of Time to File U.S. Individual Tax Return. And on there you can request a six-month extension of time to file. I want to point out, however, that the extension of time to file is not extending the time to pay. So, the payment still has to be made timely to avoid penalties and interest. Veronica , I think this might be good time for our third polling question. What do you think? TUBMAN: I think you are right, Bethany, thanks. All righty. Filing Form 4868 to extend the due date for filing Form 1040-SS or Form 1040-PR also extends the payment due date. Is that, A, true, or, B, false? OK. So please take a minute and click on the radio button that you believe most closely answers this question. So just think about what Bethany just shared with us. So, do you think the correct answer is, A, true, or B, false? So, we'll just take a minute to give you a little bit more time to make your selection on that. So, filing Form 4868 again to extend the due date for filing Form 1040-SS, or Form 1040-PR, also extends the payment due date. Is that, A, true, or, B, false? To make sure everyone has enough time to put their information in. And a little bit longer based on what Bethany shared. OK, so we are going to stop the polling now And we'll share the correct answer on the next slide. And the correct answer, drum roll, is A, true. Filing Form 4868 to extend the due date for filing Form 1040-SS also extends the payment due date. And let's see, 94 percent of you responded correctly. You rock, good job, great response rate. OK, Bethany, then I am going to send it back to you for our next topic. KRAUSE: OK, thank you, Veronica. And I just wanted to finish up on this portion just to say who should make estimated tax payments during the year? Thank you, Veronica. The individuals who expect to own Self-Employment Tax of $1,000 or more should make estimated tax payments. And to do that you use Form 1040-ES, Estimated Tax for Individuals. And that's where you make quarterly estimated tax payments. Now, Tracy is going to talk further about the importance of doing so Tracy? MCFEE: Thank you, Bethany. Now we've already talked about the benefits of payment self-employment taxes, which is that you, they will provide you with the ability to receive credit for Social Security purpose. And we want to emphasize the importance of paying these taxes in a timely manner. Generally, the Social Security administration will give credit only for self-employment tax reported on the tax return filed within three years, three months and 15 days after the year in which the income was earned. So, in order for you to receive credit for purposes of calculating your first Social Security benefits payments must be received no later than three years, three months and 15 days after the year for which they apply.

For example, payments for 2014 self-employment tax that were received after April 15th, 2018 will not be credited to your account for purposes in calculating the future Social Security benefits.

It's also important to pay your self-employment taxes on time so that you can avoid being charged penalties and interest. If you do not properly and timely report and pay self-employment taxes you could be subject to some of the following: the Estimated Tax Penalty, the Failure to Pay Penalty, the Failure to File Penalty, the Accuracy Related Penalty, the Civil Fraud Penalty, the Fraudulent Failure to File Penalty and interest. So, on the next few slides I am going to cover these penalties and talk about interest in more detail. So, we are going to start off by talking about the Estimated Tax Penalty. The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. If you didn't pay enough tax throughout the year, either through withholding or an estimated tax payment you may have to pay a penalty for under-payment of estimated tax.

Generally, you can avoid this penalty if you either owe less than $1,000 in tax after subtracting any withholding and estimated tax payments made during that year or if you paid at least 90 percent of the tax for the current year or 100 percent of the tax shown on the return for the prior year, whichever is smaller. The IRS calculates the penalty separately for each required installment. The number of days late is first determined and then multiplied by the effective interest rates for the installment period. The authority for the penalty for failure to pay proper estimated tax is IRC Section 6654 . The Internal Revenue Service provided extended penalty relief to taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year. This means that the IRS is waiving the Estimated Tax Penalty for any taxpayer who paid at least 80 percent rather than the 90 percent as shown on this slide, of their total tax liability during the year through federal income tax withholding, for early estimated tax payments or a combination of the two. Use Form 2210 which is under-payment of estimated tax by individual, it states in trust, to see if you owe a penalty for under-paying your estimated tax. And for more information you can also refer to IRS Publication 505 which is titled Tax Withholding and Estimated Tax. Next, we are going to talk about the penalty for failing to file on time. If you owe tax and don't file your tax return on time, there's a penalty for not filing on time. Failure to File Penalty is usually five percent of the unpaid tax required to be reported on the return, and it's charged for each month or part of the month that the return is late, up to five months. The maximum Failure to File Penalty therefore is 25 percent of the unpaid tax, which is five percent times five months. If your return is over 60 days late, there's also a minimum penalty for late filing and it's lesser of two amounts, 100 percent of the tax required to be shown on the return that you didn't pay on time or a specific dollar amount that is adjusted annually for inflation. This amount that's adjusted annually for inflation is $205, returns that were due between January 1st, 2016 and December 31st, 2017. That amount was adjusted to $210 for returns due between January 1st, 2018 and December 31st, 2019, and it will be increased to $215 for returns due on or after January 1st, 2020. The authority for the failure to file penalty is found in Internal Revenue Code Section 6651(A)(1), and this code section mandates that a penalty be assessed when a return is filed late and the tax due was not paid by the return due date. If you can't file on time request an extension either electronically or on paper using Form 4868, the Application for Automatic Extension of Time to File a U.S. Income Tax Return, again, an extension to file. OK, next, let's talk about the Failure to Pay Penalty. And this is an addition to the Estimated Tax Penalty. There is another penalty, which is the Failure to Pay Penalty, which is for not paying on time. The Failure to Pay Penalty accrues from the due date of the return until the tax is paid in full. And the Failure to Pay Penalty is one half of one percent for each month or part of a month, up to a maximum 25 percent of the tax that remains unpaid. If you cannot pay, it's best to file on time and request an installment agreement. So if you file your Form 1940-SS or 1040-PR by the due date and request an installment agreement and are unable to pay, you take one half of one percent rate that applies for the Failure to Pay Penalty will decrease to one quarter one percent for any month in which an installment agreement is in effect. The authority for the failure to file penalty is found in IRC Section 6651(a)(2)(3) . Now let's move on and talk about accuracy-related penalties. The two most common accuracy related penalties are the Substantial Understatement Penalty and the negligent or disregarded rules and regulations penalty. These penalties are calculated as a flat 20 percent of the net understatement of tax. An understatement of tax is considered substantial for purposes of the accuracy related penalty for substantial understatement if it is more than the greater of 10 percent of the correct tax or $5,000.

Negligence includes but not limited to any failure to make a reasonable attempt to comply with the Internal Revenue laws or exercise ordinary and reasonable care in the preparation of a tax return. OK, next we are going to move on and talk about two other penalties that are a little more, um, stringent or strict than the Failure to File Penalty and the Failure to Pay Penalty or the Accuracy Related Penalty So, we are going to talk about the Civil Fraud Penalty. The Civil Fraud Penalty applies if there is an underpayment of tax on your return due to fraud If the Civil Fraud Penalty applies 75 percent of the underpayment due to fraud will be added to the tax liability. The authority for the Civil Fraud Penalty is found in IRC Section 5663 and the IRS, there is the burden of proving civil fraud by clear and convincing evidence. In addition to the civil fraud or instead of the Civil Fraud Penalty the Fraudulent Failure to Pay Penalty could apply. And this penalty applies if the failure to file a return is fraudulent. The authority for the Fraudulent Failure to File Penalty is set to set forth in IRC Section 6651-F .

Fraudulent failure to file increases the failure to file penalty which we discussed earlier, to a rate of 15 percent rather than 5 percent of the tax owed for each month or part of the month that is if tax return is late, up to a maximum of 75 percent. OK, now that we've talked about penalties that could apply, Bethany next will discuss interest. Bethany? KRAUSE: Thank you, Tracy. OK, interest is another important consideration. Generally, it accrues on any unpaid tax from the due date of the return until the date that the tax is paid in full. So that it applies to any unpaid balance until it's paid. The interest rate is determined quarterly, using the federal short-term rate plus three percent and it compounds daily. Veronica , I think we have time for one more polling question. TUBMAN : It looks like we do, Bethany. OK, audience, here is our fourth and final polling question so put your thinking caps on and it's another true or false. "Interest on unpaid tax compounds daily and accrues from the due date of the return until paid in full?" Is that, A, true, or, B, false? So please take a minute and click in the radio button that you believe most closely answers this question. And this based on the information that Bethany just shared with us. Do you think the correct answer again is, A, true, or B, false?

I will give you a little bit more time to think about what was shared about the interest computed and all the other information that was shared with us just a little while ago, important information regarding rates and things of that nature. OK, just a few more minutes, a few more seconds, I apologize, to make your selection. OK, let's read that one more time, "Interest on unpaid tax compounds daily and accrues from the due date of the tax return until paid in full." That's, A, true, or B, false? OK, we are going to stop the polling now and we'll share the correct answer on the next slide. And the correct answer is A, true. Let's see, how many of our listening audience answered that correctly. And here we go again, 94 percent, that's really good, really a great response rate. And it seems like you all are really listening to the information and we're, we thank you for being so attentive. Bethany, I see you have more materials that you could share with our audience, so I am just going to turn it right back over to you. KRAUSE: Thank you, Veronica. I do have just a couple more things to say here. There are a few other situations, and someone had asked this about one of these and I will get to that on the next slide, but there are a few other situations that require you to file a Form 1040-SS or 1040-PR with the IRS. It is used to pay the employee portion of Social Security and Medicare Tax on unreported tips, on wages from an employer with no Social Security or Medicare Tax withheld. And, or, uncollected Social Security and Medicare Tax on tips or group term life insurance. So, if you have unreported tips or if your employer failed to withhold Social Security and Medicare, those are instances in which you would use the 1040-SS or 1040-PR. Or if there is uncollected Social Security and Medicare Tax on group term life insurance. If any of these situations apply to you, um, you would like to see the instructions for Form 1040-SS or a 1040-PR for further details. OK, you would also have to file a Form 1040-SS or 1040-PR if you owe additional Medicare Tax. And that was one of the questions that we got. Someone was asking about that and they were wondering if, um, if a person is in that situation, if a person has a W-2 income, and they also have additional Medicare Tax due. Is it filed to the U.S.? Do they file that to the U.S. separately on a 1040-SS? And the answer to that is yes, if there is, if you are a bona-fide resident in a U.S. Territory and you have additional Medicare tax due you would file that on a Form 1040-SS or PR. Also, it's used to report and pay household employment taxes, meaning Social Security and Medicare taxes on behalf of a household employee. For example, if you hire somebody who take care of your kids in your home or you hire an individual to come clean your house and they are working in your home cleaning or caring for children, you would use Form 1040-SS or 1040-PR to report and pay Social Security and Medicare taxes on behalf of that person. And in that case you're the employer, so you're paying the full amount for this individual and you're doing so on 1040-SS or PR. Again, the instructions will cover some of these things because we have limited time today, it's hard to go into every nuance. So, we have covered a good deal of ground today and as I said, we can't cover everything, so listed here are some resources that you might be able to find helpful, particularly there's a practice unit on determining whether or not a person is a bona fide resident of a U.S. Territory. OK Veronica, that concludes our presentation, so I'll turn it over to you now for the Q&;A. TUBMAN: OK, thanks, Bethany. And hello again, and it's me, Veronica Tubman and I'll be moderating the Q&;A session. Before we start the Q&;A session, I want to thank everyone for attending today's presentation on U.S. Territories and Self Employment. Oh, OK let's see, give me one moment. OK, the third polling question should be false and not true, and we do apologize for that confusion.

Let's go back and take a look at it briefly. Interest on unpaid tax compounds daily--I apologize, on the third polling question, that was the fourth. OK, interest on unpaid tax compounds daily and accrues from the due date of the return until paid in full. And that question should be false. It should be false and not true. We do apologize for any confusion that that may have, that's put out there. But we're thankful that somebody caught that in time so that we're all learning together. And we thank you for that. OK, back to the Q&;A session. Again, thank you for attending, thank you for your attentiveness. OK. Tracy McFee and Bethany Krause are staying on with us and they will be answering our questions. If you haven't input your question, you still have time, so go ahead and click on the Ask Question button and just give you a few minutes to type in your question so that we can go ahead and take a look at it and respond to any questions that you may have. KRAUSE: Well, Veronica, I see a question. This is Bethany. TUBMAN: OK, Bethany, thank you very much. KRAUSE: Yes, there's a question here about a taxpayer who the taxpayer who had a $150,000 employee job and the side job and they're asking the taxpayer only had to pay Medicare tax on the side job because Social Security, the maximum amount of Social Security was met from the employee job. They're wondering if that's correct, they wanted some clarification. And yes, that is correct, that is true, because he exceeded the threshold of the amount on his day job, they had already taken enough Social Security out, but there was no more due. But there's no cap on the Medicare and that's why he had to pay the Medicare piece. I just wanted to clarify that and I'll give it back to you, Veronica. TUBMAN: OK, we appreciate you.

We really do appreciate this. So, let's take a look at some more of those questions because you know one thing before we continue on, we may not have time to answer all of your questions, however, we're going to try to answer as many as time allow. So, I'm going to go back because it is very, very important, so that third polling question and the question said, filing Form 4868 to extend the due date for filing Form 1040-SS or Form 1040-PR also extends the payment due date.

And just don't forget that that answer should be false. Always remember that an extension is an extension for filing purposes and not an extension of paying and that applies with any return or any return you file or any taxes due. Extension only extends the period of filing and not the time for paying, the paying due date. So, the answer to the third polling question was false.

So, we're going to get back to our Q&;A and while we have Bethany and Tracy with us to help us out a little bit here. OK, so let's see, why is notary republic income not subject to self-employment tax? Can one of you ladies answer that for us, please? MCFEE: Sure, I'll be glad to answer that. This is Tracy and the reason for that is actually there is a Treasury regulation. It's Treasury regulation 1.1402(c)-2(b), so let me quote that citation again 1.1402(c)-2(b). And what that does, that Treasury regulation talks about is it talks about income with respect to the functions of a public office and how that doesn't constitute a trade or business. And in that particular sub-section which is 1402(c)-2(b) of the regulation, it states that the meaning of public office includes services performed as a notary republic. So, the fees that a notary republic receives is not considered to be a trade or business, so therefore it's not going to be subject to self-employment tax. So hopefully that clarifies the question for our audience. TUBMAN: OK, I appreciate you, Tracy. OK, let's see, we have some really good ones. As in all things, let's see, can you amend a 1040-SS? And if so, what form would you use to amend a 1040-SS? You may have left off some income when you filed that form. Ladies?

Ladies, Tracy, Bethany, either one of you can just go right ahead and answer that for me. Tracy and Bethany? MCFEE : I'll answer it one way and perhaps Bethany will answer it in another, because here's the thing, you don't necessarily have to use a Form 1040-X to amend a tax return.

You can write amended across the top of the form and file it as an amended return. So, you could use the same form that you originally filed on and write amended across the top. Bethany, did you have anything you wanted to add to that? KRAUSE: No, that was my thought exactly. I have the same thought. You answered it the same way that I would have. Thank you. TUBMAN: Thank you, ladies. I appreciate that. So just don't forget, you have to amend you 1040-SS.

You can just write right across amended, right across the top of that form and go ahead and file it in case you may have inadvertently left off some income. Thanks, ladies. OK, let's take a look at some other information. Let's see, good, good questions. OK, now--OK, let's see, I am going to take a look and let's see, here's a good one. OK, um, concerning high insurance deductibles, is it not deductible on the SS because it is a deduction on the Form 1040? Ladies?

KRAUSE: I'm sorry, can you repeat that please, I didn't hear all that. TUBMAN: Sure. I do apologize, concerning health insurance deductibility, is it not deductible on the SS because it is deductible on the 1040? KRAUSE: The case with that is that it was deductible on the Hacienda return and I also want to clarify the term Hacienda, that is the taxing authority in Puerto Rico.

So, it could have been on the Hacienda return, it could have been on the USVI return. The bottom line is on the Puerto Rican return, I think that example about Puerto Rico, on the Puerto Rican return, they are able to deduct that expense, but for self-employment tax purposes with the IRS, they are not. TUBMAN: OK. KRAUSE: So again, we're talking about a bona fide resident of Puerto Rico and she was allowed to do this. They filed their income tax return with the Territory and on there, that is a difference between how they compute things for their Territory income tax purpose and how the IRS looks at it for the purpose of self-employment tax. I hope that clarifies it. TUBMAN: OK, thank you. I appreciate that. Let's see, let's take another look here and does the IRS require a copy of taxpayer's U.S. possession income tax return with the Form 1040-SS? MCFEE: I'll take that one. Actually, the answer to that question is no.

When you file a Form 1040-SS or 1040-PR to report your self-employment tax as a bona fide resident of a U.S. Territory, you do not need nor should you attach a copy of the tax return, the income tax return you filed with your Territory's tax authority. So do not attach a copy of, for example, you were Territory income tax return, the Hacienda return as Bethany just mentioned earlier or any other tax return that you filed with a U.S. Territory, instead just file the 1040-SS or the 1040-PR using the information from your business as far as your income and expenses to complete the appropriate sections of the form and to compute and pay yourself employment tax. TUBMAN: OK, let's see, that's a really good one and here's another, when you pay estimated taxes throughout the year, is that the same as paying self-employment taxes? What's the difference in those two taxes? MCFEE: I'll take that one as well or Bethany, do you want to take it? KRAUSE: OK, or you can, it doesn't matter, go ahead. MCFEE: OK, so estimated taxes are a way to pay your taxes as you go throughout the year because the United States has a pay as you go tax system. That means that your taxes are considered to be paid during the year in which you're earning the income. So estimated tax can include self-employment taxes that are not paid to withholding. It can also include income taxes that are not paid with the withholding. So self-employment--so estimated taxes can be both income tax and/or self-employment tax. It's simply to make payments to cover whatever your tax liability is at the end of the year. So if you are a bona fide resident of a U.S. Territory and you're not filing an income tax return with the IRS, and your only income is from self-employment, you need to be making estimated tax payments to cover your self-employment tax liability. So at the end of the year, you don't, come, end up with an Estimated Tax Penalty. And, again, we went over the rules about the Estimated Tax Penalty, at the end of this presentation we were discussing the penalty. So there are some limits on whether an Estimated Tax Penalty would apply and that's based on how much tax you owe when you file the return versus how much you paid in during the year. So generally, if you paid, owe less than a thousand dollars or you paid in 90 percent of the tax liability at the prior year, then you may not be subject to an Estimated Tax Penalty. TUBMAN: OK, good job. OK, Bethany, you went over this, just as a little reminder, what is the source of the name Hacienda return? You covered that, could you just go over that for us. KRAUSE: Yes, that's the name of the--yes, I think we used that one of the examples where the taxpayer was from Puerto Rico and that is the name of the Puerto Rican taxing authority. In the U.S., we have the IRS. In Puerto Rico, it's Hacienda and in the U.S. Virgin Islands, it's the Bureau of Internal Revenue or the BIR, so each Territory has its taxing authority that may have, well does have a different name from IRS. TUBMAN: Well, thanks, Bethany. I'm just wondering what that was about. OK, here's another one and this one is for Tracy. Are the self-employment tax rates the same for all U.S.

Territories, Tracy? MCFEE: Yes, the self-employment tax rate is set in the Internal Revenue Code and that's the Social Security portion being 12.4 percent right and the Medicare portion being 2.9 percent rate.--they're not dependent on which Territory you are in. TUBMAN: OK, all righty. And I think that that's about all the time that we have for questions. If you participated or if you are participating to earn a certificate and related continuing education certificate, you are qualified for two credits by participating for at least 100 minutes from the official start time of the webinar, which means the first eight to nine minutes or so that we were chatting, when we were engaged and enjoying each other's company from the top of the hour, that does not count towards your 100 minutes. And we are really sorry about that. If you stayed on for at least 50 minutes from the official time, well, guess what, we have time for more questions, so sorry about that one. This is exciting, I appreciate it. So, Bethany and Tracy, put your thinking caps on, we're going to go back and grab up some more questions. OK, so let's see. Well we talked about the notary and we talked--and it just seems to be still a little concerned Tracy and why not taxation on notary public services, we keep getting that question, maybe we can just go over that one again. MCFEE: OK, I'll go over that again, I'll be glad to.

OK, it has to deal with the regulations, the code section 1402 and Internal Revenue Code Section 1402 defines that earnings from self-employment, so it defines what income is subject to self-employment tax and there is a regulation that's associated with that code section, that's Internal Revenue Code Section 1402. And that regulation is Treasury Regulation 1.1402(c)-2(b).

And that particular regulation carves out or exempts notary, income from the services as a notary republic as being trade or business income. So, because the income received for services as a notary public is not considered trade or business purposes under code Section 1402, that means that it's not going to be subject to self-employment tax. It does not mean that it's not subject to income tax. It simply means that it's not trade or business income that's subject to self-employment tax. So again, one more time, that citation, I know we through these fast sometimes, is one, Treasury reg 1.1402(c)-2(b). TUBMAN: OK, we appreciate that. OK, Bethany, let's go back to one of our questions we had concerns about one of our questions. If J is making over 100,000 a year, and that was one of our examples, in his day job and only 4,000 net on his sideline business, could he just report the $4,000 income as a hobby and not have to pay into Social Security? KRAUSE: Thank you. And the answer to that is no. He is not able to do that. First of all because he has this profit and it's over $400. So he needs to pay Social Security on that. He's got self-employment income of $400 or more and therefore he must pay self-employment tax. Thank you. TUBMAN: OK, thank you, I appreciate that. OK, Tracy, I have an additional question so that we'll make sure that we're kind of clear. The example has two businesses, so one of the examples that you provided, those taxpayers have to file two Form 1040-SEs for the example with the two businesses, Tracy? MCFEE : No. For purposes of computing your self-employment tax, you're going to net your income from all trades or businesses that will be subject to self-employment tax. So if you are a sole-proprietor within our example with S, right and you have two businesses, you would only file one either Form 1040-SS or 1040-PR if you are a resident of a U.S. Territory who does not have to file a U.S. income tax return. Now, if you are a resident of a U.S. Territory or a person who's not considered resident of a U.S.

Territory or has U.S. Territory sourced income, or income in addition to U.S. Territory sourced income that requires you to file a U.S. income tax return, a Form 1040, then you would only file the Form 1040 and file only one schedule SE with it, again, netting your net income and loss from all of your trades or businesses that is subject to self-employment tax. So it's only self-employment tax schedule either Form SE if you're required to file--I mean a scheduled SE if you're required to file Form 1040 or a Form 1040-SS or 1040-PR if you're not required to file a Form 1040 with the IRS that you would file to report your self-employment income. So it's only one self-employment tax schedule per individual that's required to file. And hopefully that clears things up. TUBMAN: OK. MCFEE : And Veronica if you have a moment, I saw some question and I know that we mentioned in the presentation that we did not have, um, time to go into detail about who is and who is not required to file a U.S. income tax return when they have income from the U.S. Territory. I do want to point out that IRS publication 570 which is the tax guide for individuals with income from the U.S. possession has a Territory by Territory discussion of who is and who is not required to file a Form 1040 with the IRS depending on the individual, the types of income that individual has and whether they're considered to be a bona fide resident of the U.S. Territory or not. TUBMAN: OK, thank you for that clarity, we appreciate that. OK, let's see, so many really, really great questions. All right, let's take a look again, OK, I believe that this is one that we're going to ask Bethany, our expert for that one. If these are bona fide residents who are filing the 1040-SS Form, will they still need to make estimated tax payment throughout the year for the Society Security Tax and Medicare if they are a bona fide resident? KRAUSE: Yes, they should be doing that and they should be doing that quarterly, throughout the year making estimated tax payments. So I think there was another question in there about estimated tax payments, here we're talking about the Social Security and Medicare taxes as self-employment taxes because again these individuals who are bona fide residents are paying income tax to the Territory. TUBMAN: OK, thanks a lot for that. We have to make sure that we are good stewards with our estimated tax payments and our Social Security as well as our Medicare. All right, let's see. Let's take another one for Bethany, all right. Now, they had a little confusion here, so maybe you could provide a little clarify. Form SS and PR are filed with the IRS, is that correct, Bethany? KRAUSE: Yes, the 1040-SS and the 1040-PR are filed with the IRS, not with the Territory and the payment also goes to the IRS and not to the Territory.

So the payment would go to the Department of the Treasury and be mailed into the IRS. And kind of related to that, somebody had a question about how to make their estimated tax payments, what form to use and we did mention it, but I know we've covered a lot of material, so I want to reiterate that. The form that they will use is 1040-ES and I know it's a lot of different 1040s today, 1040-PR, 1040-SS, so that's the 1040-ES. That's what you make the quarterly estimated tax payments on for those Social Security and Medicare taxes, thank you. TUBMAN: OK, good. KRAUSE: And it's used for individuals who have income tax, but in this case, it would not be income tax.

TUBMAN: OK, thank you very much. So just to remind everybody that even though it has been a lot of information, you can always go to www.irs.gov and take a look and put in the search engine in the upper-right hand corner if you have any more questions. So let's see, we have a really, really--a couple of really good ones. OK, here is another question, the 1040-SS is specifically for U.S. residents of U.S. Territories or for residents with businesses in, say in Puerto Rico.

Bethany, could you give us a little bit more clarity on that one and I'll just read it one more time. The 1040-SS is specifically for residents of U.S. Territories or for U.S. residents with businesses in, say, Puerto Rico. Would you help us out with that? KRAUSE: Sure. The 1040-SS, again, this applies to net income from self-employment for an individual who's a bona fide resident in a U.S. Territory. It could be Puerto Rico. It could be any of the other Territories. So, if you're a bona fide resident of a U.S. Territory and you have net self-employment income of $400 or more then you're going to be filing a 1040-SS or a 1040-PR, they are interchangeable. I hope that that answers the question. TUBMAN: OK. Thank you very much. We have such really, really good questions and we want to make sure that we address everybody's question. There are really some good ones. OK. Let's take a look again. Let's see. And I know that we made a discussion about notary expenses but are expenses from notary services deductible and that was in example four and I know we've talked about that. So, could you just give us a little bit more clarity regarding notary services deductible expenses, please? And that was in the example four, Bethany. KRAUSE: Yes. And if it's helpful to the audience, do you want to back up to that particular slide, that might be helpful and I'm speaking about slide 46. TUBMAN: OK. KRAUSE: So they, on their Territory return, they were allowed to deduct. They had $5,000 in notary income and on the Territory return, they were allowed to deduct the expense against that income and they did. But on the 1040-PR because in this instance they were from Puerto Rico and so they filed with the Hacienda and with the Hacienda they were allowed to deduct it, but on the 1040-PR they don't count the notary income at all for purposes of self-employment tax. And so, they take the net profit from the notary services and back that out because they're going to pay self-employment tax on all of their self-employment income except for--their net self-employment income except for that amount.

The other difference you see on this slide if you look at the line that says business expenses, that's a different issue but that's the $7,000 that the individual paid for their individual health insurance for themselves which, on the Puerto Rican return, was allowable as a about expense but for purposes of the United States self-employment tax, it isn't. So, those are the two differences we see here. I hope that makes it clearer. TUBMAN: OK, appreciate that. OK, Tracy, in here we have a question. If, can a resident of Puerto Rico file a form SS if their language is English? MCFEE: Thank you. That's a great question. TUBMAN: Tracy? MCFEE: Yes. That is a great question. And the answer to that yes, you can file, a resident of Puerto Rico has the option of filing either a Form 1040-SS or a Form 1040-PR. If the prefer to use the English version of the form then they would file a 1040-SS. If they prefer to file the form in Spanish, they can file the 1040-PR. TUBMAN: OK. Thanks for that, Tracy. Good to have those options. OK. Let's get back to our questions and let's see what else we have. All right. So, based on one of the examples, Bethany, the question is why is 7K not deductible and you just went over that but we're just going to touch on that one more time just for a little bit more clarity because that's very important. You just addressed that so can you recap that for us, please. Bethany? KRAUSE: Oops , I had muted myself. Sorry. TUBMAN: OK. No problem.

KRAUSE: Talking to myself here. OK. That's because the Territory has its own taxing authority and their rules may be different from ours. So, what we were highlighting there is the fact that on the Territory return, that was a deduction so their net income for Territory purposes, their net self-employment income is not necessarily the same as their net self-employment income for U.S. self-employment tax purposes. So, there isn't a deduction for that on the U.S. side for self-employment tax and that's why they weren't able to deduct for self-employment tax purposes with the U.S. TUBMAN: OK. Thanks for that. That's really, really great questions and I think, could Tracy or Bethany, you provide the IRC code for the estimated tax penalty, someone used that as a reference so that's one of our questions. What was the number for the IRC Internal Revenue Code of the Estimated Tax Payment Penalty? MCFEE: That was Internal Revenue Code 66--I'm sorry--6654 so it's IRC 6654. TUBMAN: OK. Thank you. It's always a good reference to make sure that we're filing and paying timely. We have another question. How are we going to determine if the person has to file a Form 1040 as opposed to a 1040-SS or a 1040-PR and I'm going to direct that--ask Bethany to help us out with that. KRAUSE: Again, it depends on whether they are a bona fide resident of the U.S. Territory or not. If you're a bona fide resident of a U.S. Territory, you would have a Territory filing obligation. Bona fide residents of U.S. Territories report their worldwide income Territory. And so, the SE piece, the Self-Employment Tax piece, the Territory doesn't collect that, the IRS does. So, that's why they would send it into the IRS on the1040-SS or 1040-PR. If they're not a bona fide resident, those individuals file U.S. Form 1040 reporting their worldwide income and they use the schedule SE. So, if you're required to file a 1040 with the IRS then you use the SE just like anyone else using the Form 1040 would do. But if you don't file a Form 1040 because you filed with the Territory because you're a bona fide resident there, those are the people that would use 1040-SS or PR. TUBMAN: OK. Thanks a lot, Bethany. So, Tracy, maybe you can help me with this particular question. So, the forms only for bona fide residents that Bethany just shared with us. So, what about if the taxpayer lived in the U.S. for less than 183 days, can you provide us a little clarity on that? MCFEE: OK. TUBMAN: Or explain, I think, what a bona fide resident is--I'm sorry. Go right ahead. MCFEE: Sure. I'll be glad to explain that. I'll also tell you where some information can be found about that. So, first of all, there is a section in Publication 570 which is the tax guide for individuals with income from U.S. possessions. It's chapter one that talks about bona fide resident. And bona fide resident in a U.S. Territory is determined based on Internal Revenue Code section 937. So, the rules for determining bona fide residency status in a U.S. Territory is set forth in IRC Section 937 if that helps people. So, if you are a U.S. citizen or resident alien, you will be considered a bona fide resident (pause)

-- to determine whether or not you're a bona fide resident of a U.S. Territory is the presence test, it's the tax home test and it's whether or not you have a closer connection to the United States or to a foreign country than to the Territory. So, I'm going to talk briefly about the presence test. And if you're a U.S. citizen or resident alien, you're going consider how many -- how long you were present in the relevant Territory during the tax year. So, if you were present in the relevant Territory for at least 183 days during the tax year, you would have met the presence test. There's also a look back period. So, if you were present in the Territory for at least 549 days during the three-year period that includes the current tax year and the two years before that, you're going to be counting your days and if it's at least 549 days, then you would be, would meet the presence test as long as you're also present in that Territory during the year you're looking at for at least 60 days. In addition, you would have--another test is that you are present in the United States for no more than 90 days during the tax year. Or if you had earned income in the United States no more than $3,000 and were present for more days in the Territory than in the United States then we would consider you to be a bona fide resident or if you had no significant connection to the United States during the year. So, in the presence test alone, there are five additional tests. So, I really recommend that you look at either Internal Rev Code Section 937 or look through the information that's in the chapter one of Publication 570 that talks about bona fide residents in the U.S. Territory or I believe on the reference side we had one of our references is a practice unit on the topic of bona fide residency status in the U.S. Territory. If not, a practice unit is kind of a write up or an analysis of a particular issue and you can find them on irs.gov by typing practice units in the search engine and we actually do have a write up on the topic of bona fide resident status in the U.S. Territory that has all the citation. Hopefully that helps our audience. TUBMAN: OK.

Thank you very much. This is a question that regarding the gross receipts method for the farm and computing self-employed income. Ladies, can somebody help us with that question from one of our examples? KRAUSE: I'm sorry, can you repeat that? I think I missed it. Can you say it again? TUBMAN: Sure. It was from one of our samples. It said that--examples, not sample, example. Can the person that was listed use the gross receipts method for the--that was for the farming in computing their self-employment income and they use the gross receipts method for computing their self-employment income? KRAUSE: I'm going to defer to Tracy on that. I think she knows more about farming than I do. TUBMAN: OK. MCFEE: Thanks. First of all, I believe IRS Publication 225 is the farmers' tax guide and talks in depth about the optional methods for computing self-employment income for farming businesses. So, that's also a good reference. In the instructions to the Form 1040-SS, there is actually information about the optional method for farmers and as I recall, um, I don't think that this particular taxpayer meets that criteria in our example. And I think part of the reason why is they actually have loss from farming that year. But, again, for more specific discussion of whether or not the optional farm method, gross receipt method for computing self-employment for farm businesses would apply, you can refer to the Publication 225 that has a really good resources for farmers and I highly recommend it for anybody who's engaged in the farming business. TUBMAN: Thank you, Tracy, for the reference and thank you for responding to that question. OK, Bethany, are expenses for notary service -- I'm sorry--what are some of--are expenses from notary services deductible in example four.

KRAUSE: I think, I think I kind of have addressed that with one of the other questions.

TUBMAN: Yes, you did. KRAUSE: Yes, they are deductible at the Territory level but not for the U.S. self-employment tax. TUBMAN: OK. All right. Appreciate that. It's like that question comes up and we just needed a little clarity and we do appreciate that from you. And one more question, we have time for one more question. Let's see. I think that is the same similar question. So, we do thank you, Tracy, and I do thank you, Bethany, so much for answering those questions and the references that you provided us with. We really do appreciate that. And if we did not have time to answer your question, you know we tried to answer as many questions as time would allow it and we really like to thank you for your participation. We really do appreciate it for your clarity and for your promptness. If you're participating to earn a certificate and related continuing education credit, you will qualify for two credits by participating for at least 100 minutes from the official start time of the webinar which means the first eight to nine minutes or so of chatting. When we engaged at the top of the hour does not count toward the 100 minutes and we are sorry about that. We do apologize. If you stay on at least 50 minutes from the official start time of the webinar, you will qualify for one credit.

Again, the time we spent chatting before the webinar started doesn't count towards the 50 minutes. So, OK, Tracy, and Bethany, I hope that you're ready, we've received a lot of questions. So, we've got to as many of those as we could and we do appreciate again for you sharing your expertise with us and with our listening audience. So, before we close the Q&;A session, Tracy, do you have any key points that you and Bethany want the attendees to remember from today's webinar? MCFEE: Yes, we do. And we know we covered a lot of ground today but we'd like to leave you with a few key points. And the first one is, if you live or work in a U.S. Territory or live and work in a U.S. Territory and have net earnings from self-employment of $400 or more, you must report and pay self-employment tax even if you are not required to file an income tax return with the IRS. If you're not required to file a U.S. income tax return then you would file 1040-SS or Form 1040-PR with the IRS to report and pay your self-employment tax.

And as we've discussed quite extensively today and we thank you for your questions about it, fees for notably public services are not considered self-employment income that's subject to self-employment tax. However, all other self-employment income will be subject to self-employment tax. And finally, as a reminder, in addition, as a reminder, some operating expenses that may be deductible on returns filed with the Territory's tax agency may not be allowable in computing the net income for U.S. self-employment tax purposes. And I think we had some examples of that like the adjustment to gross income for one half of SE tax that may be sometimes recorded as a business expense on the Puerto Rico tax return but is not allowed computing net self-employment income tax for U.S. tax purposes or U.S. self-employment tax purposes. And finally, the reason why you want to file your self-employment tax return, not only because the IRS expects you to but also because the Social Security Administration uses this information from your Form 1040-SS or Form 1040-PR to compute your Social Security benefits.

Veronica, back to you to wrap up for today's session. TUBMAN: Thanks a lot, Tracy. We really do appreciate you and Bethany for sharing. We appreciate the question. We are planning additional webinars throughout the year. Now, to register for any upcoming IRS webinar, please visit irs.gov using the key word "webinar" and select the webinars for Tax practitioners or webinars for small businesses. And, yes, we'll be offering certificates and CE credit for other upcoming webinars. You may also visit the IRS video portal at www.irsvideos.gov. The IRS video portal contains videos and audio presentations on topics of interest to small businesses, individuals and tax professionals. You will also find video clips of tax topics and archived versions of live webinars so just in case you missed something, or you had some scheduling conflict, you can always go right back to the IRS video portal and take a look at it. And, again, a really, really big thank you to Bethany and Tracy for a great webinar and for sharing their expertise answering your questions today. I also want to thank you, most of all, our attentive attendee, for joining us today for our webinar on U.S. Territories Self-Employment Tax.