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Jan 1994

U.S. citizens abroad and Social Security. (Federal Taxation)

by Carter, Leonard H.

    Abstract- Americans working overseas may opt to pay Social Security taxes. This is possible if they work for an American corporation or for an affiliate of an American corporation. However, the decision to deduct Social Security taxes is incumbent upon the employer rather than the employee. If they are allowed to pay the tax, formally known as the Federal Insurance Contributions Act (FICA) tax, then they have to determine how they stand with regard to two common problems: double taxation and eligibility for benefits. In countries where the US has bilateral totalization agreements, these problems are automatically resolved since the rules on payments and benefits are formally codified. Ininstances when circumstances do not permit payment of the FICA tax, most Americans have the option of deducting their contributions as income tax.

Who is Covered

U.S. citizens working abroad may be subject to FICA. The taxes must be withheld if the work performed would be covered by FICA in the U.S. Citizens abroad employed by an American corporation are subject to the tax |IRC Sec. 3121(h).

Coverage is optional for citizens working for a foreign affiliate of an American employer. An affiliate is any entity in which an American employer has at least a 10% interest |IRC Sec. 3121(1).

The option for coverage rests with the American employer, not the employee. Once an election is made, all U.S. Citizens and resident aliens employed by the foreign affiliate must be included. Once the decision is made, it is irrevocable.

A person carrying on a trade or business, either as an individual or as a partner is subject to the Self-Employment Contribution Act (SECA), provided self-employment income is more than $400 (IRC Sec. 1401). A "trade or business" is generally described as any activity carried on for profit. The definition includes the professions. The exclusion for foreign earned income under IRC Sec. 911 cannot shield a U.S. citizen from the SECA tax.


Two major problems are presented for citizens working abroad. First, is the problem of double Social Security taxation, and, secondly, the problem of eligibility requirements for benefits under each country's Social Security system.

The problem of double taxation arises when a taxpayer leaves his or her home country and is gainfully occupied in a foreign country, red becomes subject to Social Security taxes in both countries on the same income.

Individuals are required to contribute a certain amount to a country's Social Security fund to become entitled to benefits. Some individuals may never satisfy this requirement because of the ephemeral nature of their employment or occupation, even though the combined contribution would equal or exceed the required levels.

Totalization Agreements

To alleviate or eliminate these problems, the Social Security Act authorizes the Department of Health and Human Services (HHS) to sign agreements with other countries. These agreements, unlike tax treaties which require approval of two-thirds of the Senate, called totalization agreements, do not require formal Congressional approval.

Totalization agreements are in effect with thirteen countries: Austria, Belgium, Canada, France, Germany, Norway, Spain, The Netherlands, Italy, Portugal, Sweden, Switzerland, and the United Kingdom. Agreements are in process between the U.S. and Australia, Brazil, Denmark, Ireland, Finland, Luxenbourg, Greece, Israel, Japan, and New Zealand.

These agreements vary in some respects from country to country; but there are some concepts which are basic to most, namely double taxation and coverages.

Relief From Double Taxation

Most countries having totalization agreements with the U.S. have higher Social Security taxes. Consequently, the double tax provisions are of great importance to U.S. Citizens. All agreements must provide that an individual may not be subject to Social Security tax imposed by the U.S. and by the other country at the same time; only one of the countries may impose the tax, and that is usually the host country.

Totalization of Benefits

If the employee or self-employed worker has accumulated periods of coverage under the Social Security systems of either the U.S., or the host country, and the period of his coverage in either country is not long enough to entitle him to benefits, he may elect a pro rata or "totalized" benefit from either country. For example, if he has four years under the U.S. system and 14 years under the host country's system which requires the completion of 15 years to become eligible for benefits, both countries would consider the individual as If he had completed 18 years of coverage under each system. The individual's U.S, Social Security benefit would be 4/18 of the benefit computed under U.S. law on the basis of his combined earnings in both countries, and the benefit in the other country would be 14/18 of the benefit computed under the law.

If the individual qualified for benefits under the statutes of one of the countries, however, he or she would not be required to elect a totalized benefit in both countries. In the above example, the individual having completed 14 years under U.S. law would be entitled to full benefits, and could still elect to receive a totalized benefit from the other country.

Other Matters in Totalization Agreements

Totalization agreements are prohibited from covering Medicare. The agreements cover only old-age, disability, and survivor benefits. Usually a foreign Social Security tax based upon income may be deducted as an income tax, or claimed as a credit on the payor's U.S. income tax return. However, where an agreement is in effect, the foreign tax credit, or deduction is not available. There are other provisions in the agreements which may vary from country, to country.

Filing Requirements

All U.S. citizens have Social Security numbers. However, all self- employed individuals, in addition, must have a tax identification number for their business. Self-employment income is reported annually on Schedule C of Form 1040, and the tax computed on Schedule SE.

Compliance with the collection of Social Security tax for employees is automatic; the tax is withheld from salary. However, compliance with SECA is on a voluntary compliance basis. Many individuals doing business abroad are either unaware of its existence, or believe that the $70,000, foreign earned income exclusion shelters self-employment income as well. These taxpayers should be aware that when passport renewal time arrives, their failure to file may be revealed.

The benefits under the U.S. Social Security Act--retirement, disability, and survivor benefits--are substantial. Consequently, taxpayers working abroad should make every effort to come within the system. Each individual should ascertain if he is resident in a country having a totalization agreement with the U.S., become familiar with is contents and act accordingly. If resident in a non-agreement country, the SECA must be complied with. Failure to do so may not only subject him to penalties, but also deprive his loved ones of substantial benefits.

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