Understanding Noncovered Remunerative Activity Outside the United States, § 404.418

When it comes to earning income outside of the United States, it’s essential to understand the implications for your taxes and social security deductions.

In this blog post, we will explore the concept of “noncovered remunerative activity outside the United States” as defined by § 404.418, and discuss how it relates to deductions mentioned in § 404.417.

What is Noncovered Remunerative Activity Outside the United States? Noncovered remunerative activity outside the United States refers to specific types of income-earning activities that are not subject to deductions. These activities fall under two primary categories:

1. Employment Services Performed Outside the US (§ 404.418 (a)): An individual is considered to be engaged in noncovered remunerative activity if they are working as an employee outside the United States and their employment does not meet the criteria outlined in subpart K. Additionally, for taxable years ending after 1955, the services must not be performed in active military or naval service for the United States.
2. Trade or Business Conducted Outside the US (§ 404.418 (b)): An individual is also considered to be engaged in noncovered remunerative activity if they operate a trade or business outside the United States, and the net income or loss from that trade or business is not included in computing their net earnings from self-employment. This exclusion applies only if the trade or business would not be excluded from net earnings from self-employment if it were conducted within the United States.

Note that the term “United States” does not include the Commonwealth of Puerto Rico, the Virgin Islands, Guam, or American Samoa when referring to a trade or business in this context. Additionally, the term “trade or business” has the same meaning as it does in section 162 of the Internal Revenue Code of 1954.

Example: Noncovered Remunerative Activity Outside the United States

Let’s consider a scenario to illustrate the concept of noncovered remunerative activity outside the United States:

John is a US citizen who has moved to Spain to work as a software engineer for a local Spanish company. His employment services do not meet the criteria outlined in subpart K of § 404.418, and he is not involved in active military or naval service for the United States. In this case, John’s employment services in Spain are considered noncovered remunerative activity outside the United States.

Additionally, John has started a small online store that sells handmade artisanal products from Spain to customers around the world. Since the business is conducted outside the United States, and its net income or loss is not included in computing his net earnings from self-employment, this trade or business is also considered noncovered remunerative activity outside the United States.

In this example, both John’s employment services and his online store are noncovered remunerative activities outside the United States, meaning that they will not be subject to certain deductions as described in § 404.417.

Conclusion: Understanding noncovered remunerative activity outside the United States is essential for those who earn income abroad. This knowledge will help you navigate the tax implications and ensure you are compliant with the relevant regulations. If you are unsure about your specific situation, it is always a good idea to consult with a tax professional or financial advisor to help guide you through the process.

https://www.ssa.gov/OP_Home/cfr20/404/404-0418.htm