Employee or Independent contractor?

It is quite straight-forward most of the time to decide how to report an income if the taxpayer works in the US. If he receives a W-2, we would report it on Form 1040 line 1 as wages. If he does not receive a W-2 and there was no tax withholding, we would consider it self-employed income and report it in a Schedule C.

But in this case the US taxpayer works in a foreign country. Obviously, there is no W-2. And employers in that foreign country routinely do not withhold taxes, whether the worker is an employee or a contractor. In this case, we cannot rely on the availability of a W-2 or tax withholding to decide where to report the income in the taxpayer’s tax return.

I know it is tempting and more beneficial to the taxpayer to classify the income as employment income as the taxpayer may get foreign earned income exclusion and also the income is not subject to SE tax here. But obviously IRS will not like it and I do not want to put myself in trouble by helping him to arbitrarily make a determination like that either. So to be safe, shall we just report it as self-employed income when in doubt?

Why should it matter where the worker works? The decision on employed v self-employed for US tax purposes is the same.

I don't know why the IRS "will not like it". By definition most if not all employees of foreign companies don't have US FICA withheld. You should not have your client pay more taxes than required.

I know it is tempting and more beneficial to the taxpayer to classify the income as employment income as the taxpayer may get foreign earned income exclusion and also the income is not subject to SE tax here. But obviously IRS will not like it and I do not want to put myself in trouble by helping him to arbitrarily make a determination like that either. So to be safe, shall we just report it as self-employed income when in doubt?