The IRS’s Large Business and International (LB&I) division has announced a new compliance campaign targeting self-employed individuals in the U.S. territories who fail to pay or who underpay their self-employment taxes.
Background—self-employment taxes
The self-employment tax is equal to the social security and Medicare taxes on net earnings from self-employment. (Code Sec. 1401) The self-employment tax rate is 15.3%—12.4% for social security and 2.9% for Medicare. An individual must pay self-employment tax if his or her net earnings from self-employment are at least $400. (Code Sec. 1402(b)(2))
U.S. citizens and resident aliens who reside in any of the U.S. territories (Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands (USVI) or the Commonwealth of the Northern Mariana Islands (CNMI)) must pay self-employment tax on net earnings from self-employment of $400 or more. These individuals must pay self-employment tax whether or not they must pay U.S. income tax or are otherwise required to file a U.S. income tax return. (Code Sec. 1402(a)(9))
Residents of the U.S. territories with net self-employment income of $400 or more file Form 1040SS, U.S. Self-Employment Tax Return (including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico) or Form 1040PR, Self-Employment Tax Return–Puerto Rico, to report net earnings from self-employment to the IRS and, if necessary, pay self-employment tax on that income.
Background—LB&I campaigns
In January 2017, the IRS announced a new audit strategy for LB&I known as “compliance campaigns.” With the new compliance campaigns, LB&I essentially shifted to examinations based on compliance issues that LB&I determined presented greater levels of compliance risk to improve return selection. The IRS initially selected 13 compliance issues when it rolled out this strategy. See IRS rolls out Large Business and International campaign audit strategy.
New LB&I campaign
The new LB&I campaign addresses residents of U.S. territories (Puerto Rico, USVI, Guam, American Samoa and the CNMI) who either failed to pay, or who underpaid, self-employment tax to the IRS.
Territorial residents who understated their self-employment tax should file an amended Form 1040SS or Form 1040PR (as applicable) to properly report and pay their self-employment tax.
The IRS will address continued noncompliance through a variety of treatment streams, including examination.
To continue your research on self-employment tax, see FTC 2d/FIN ¶ A-6001 ; United States Tax Reporter ¶ 14,024.
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