Foreign earned income generally includes money you receive for services you perform while working in a foreign country. To qualify, you must meet the Tax Home Test and either the Bona Fide Residence Test or the Physical Presence Test.
Examples of foreign earned income include:
- Wages and salaries
- Professional fees
- Self-employment income
- Bonuses and commissions
- Noncash compensation, such as employer-provided housing or a vehicle
- Certain allowances and reimbursements provided by your employer
In short, if you're paid for work you performed in a foreign country and meet the IRS eligibility requirements, the income may qualify as foreign earned income.
What Is Not Foreign Earned Income?
Some types of income do not qualify for the Foreign Earned Income Exclusion, even if you receive them while living abroad.
The following are not considered foreign earned income:
- Corporate distributions that represent earnings or profits rather than reasonable compensation for services you performed.
- Pension and annuity income, including Social Security benefits and railroad retirement benefits that are treated as Social Security.
- Investment and passive income, such as:
- Interest
- Ordinary dividends
- Capital gains
- Alimony
- Amounts paid by the U.S. Government or one of its agencies if you were employed by the U.S. Government or that agency.
- Amounts included in income because of employer contributions to a nonexempt employees' trust or a nonqualified annuity contract.
How Do I Report Foreign Earned Income Other Than Wages?
The way you report foreign earned income depends on the type of income you received.
Self-Employment Income
If your foreign earned income comes from self-employment, report it on Schedule C, Profit or Loss From Business.
Although your Schedule C income may qualify for the Foreign Earned Income Exclusion, the exclusion does not eliminate self-employment tax. In most cases, you must still pay self-employment tax on your net earnings, regardless of where the income was earned.
Employer-Provided Housing
If your employer provides housing and the value of that housing is taxable compensation, report the fair rental value as Foreign Earned Compensation.
How Do I Enter Foreign Earned Compensation in the Program?
To enter foreign earned compensation in the program:
- Go to Federal.
- Select Income (Select My Forms).
- Choose Less Common Income.
- Select Other Compensation.
- Select Foreign Earned Compensation.
Entering your foreign earned compensation correctly helps ensure the program can determine whether you may qualify for the Foreign Earned Income Exclusion and calculate your return accurately.
Related Tip
If you're claiming the Foreign Earned Income Exclusion, be prepared to provide information about your foreign residence, travel dates, and employer details. The IRS may require additional information to verify that you meet the Tax Home Test and either the Bona Fide Residence Test or the Physical Presence Test.