GABA English teachers can easily run afoul of the IRS if they are American.

This is a follow up to a recent Japan Times article. I had hoped that the JT would have printed a letter to the editor, but I didn’t see it on the site.

For my regulars, this is review. Americans are required to report their worldwide income, and file a tax return in instances where they have earned more than about $9,000. (Not $90,000 — just nine thousand. It gets confused with another thing, below.)

Most Americans in Japan ignore this law, because they think their earnings are exempt. The other Americans tell them this, and so no one is the wiser. This is so, even though it says on the last page of an American passport, that you must file your taxes even when you are overseas.

The Foreign Earned Income Exclusion allows the filer to exclude a large amount of income—this is a number, yes, in the $90,000s. But in order to get the exclusion, you must file! (Form 2555 or 2555-EZ)

If you do not file, and the IRS asks for a return, there is a strong possibility that you forfeit the Exclusion, and can only take credits for what you paid Japan (if you paid Japan!) for income and resident’s tax.

For independent contractors, there is also something called Self Employment Tax. It is basically the employer and employee share of social security (pension) and Medicare (health insurance in old age). 15.3% up to $110,100 in 2012.

So not only do most Americans not file a tax return, most Americans also don’t enroll in the Japanese pension. As a result, they cannot certify their coverage by the Japanese. (Whether or not Japan collects the payments is a different story. We’re only talking about having that little blue book.)

Now let’s circle back to William of Indiana, who is featured in the story. He works for a company that considers him an independent contractor (the “entrusted service” contractor or gyoumu itaku.) He signs a document saying that he is an independent contractor.

If he doesn’t enroll in the Japanese pension, the IRS can very likely ask him for the Self Employment Tax (15.3%). Not being covered under either system is not part of the totalization agreement. You don’t get to “opt out”. You either are covered by (and contribute to) America, or you contribute to Japan. Companies get away with not covering people in Japan, and it’s considered an internal matter of Japan, but when you are “not an employee” but rather a solo, then the IRS is going to want to apply its own tests to whether you are or aren’t cheating on the Self Employment Tax. Then, you are an American doing your own business overseas and dodging the Service and cheating the U.S. treasury out of your share.

Are GABA workers employees? The evidence is growing by the month that the answer is “yes”. But try to prove that to a tax collector, when both you and the, ehem, employer are saying that you are an independent contractor.

Look at the bill: $1,530 Self Employment tax on $10,000 earnings, with no offset because your federal income tax is likely sheltered by the Foreign Earned Income Exclusion.

($3,160 on $20,000, etc.)