With the globalization of the US economy and the world market continuing to grow, it is not uncommon for US citizens and nonresidents alike to work in several different countries over the span of their lifetime.

Golding & Golding – International Business Tax Lawyers

Unfortunately, complex tax issues arise when it is time to file taxes in the various different countries – which may also have different “tax years” and filing dates, further compounding the confusion.

While the United States has entered into tax treaty agreements with nearly 60 different countries, that does not make the analysis any easier – in fact, sometimes it makes it harder.

For example, if a US citizen decides that they are going to work overseas that does not make them any less of a US citizen. The issue is when that person is determined to be a resident of the foreign country despite anything that is contained within the tax treaty agreement, tax problems will arise.

The individual will usually have to hire a tax attorney to prepare the necessary documentation to both obtain certification of US residency and prove to the foreign country that the individual was actually protected under the tax treaty. That is because as a U.S. citizen the person is required to file a tax return in the U.S., and as a Resident of the Foreign Country, he or she will also have to file a tax return in the foreign country.

*An example of when this becomes a big problem is when a person who is a US citizen and therefore must file US tax return is deemed a resident of the foreign country in which he or she works in the tax rate is higher. As a result, whatever the differences between the US tax rate in the foreign tax rate is money that cannot be recovered in the United States (United States is not credit individuals for taxes they pay in other countries beyond the amount that would be covered under tax treaty or foreign tax credit form 1116).

Beyond income tax, there’s also the issue of Social Security Tax. It can be very time-consuming for an individual to try to determine whether they are subject to Social Security tax in either their country of origin or the country they are performing the work it.

To try to relieve the problem, the United States has entered into totalization agreements (Bi-national Social Security Agreements) with 25 different countries. The purpose of these agreements are to make sure that individuals only pay Social Security tax to one country.


Totalization Agreements

The list of countries that the United States have entered into totalization agreements with is listed below for your reference:

  1. Australia
  2. Austria
  3. Belgium
  4. Canada
  5. Czech Republic
  6. Chile
  7. Denmark
  8. Finland
  9. France
  10. Germany
  11. Greece
  12. Ireland
  13. Italy
  14. Japan
  15. Luxembourg
  16. Netherlands
  17. Norway
  18. Poland
  19. Portugal
  20. Slovak Republic
  21. South Korea
  22. Spain
  23. Sweden
  24. Switzerland
  25. United Kingdom

The Internal Revenue Service has provided the following summary of “Social Security tax consequences of working abroad.”


General Social Security and Medicare Taxes

In general, U.S. social security and Medicare taxes continue to apply to wages for services you perform as an employee outside of the United States if one of the following applies:

You are working for an American employer which includes:

  • The U.S. Government or any of its instrumentalities
  • An individual who is a resident of the United States
  • A partnership of which at least two-thirds of the partners are U.S. residents
  • A trust of which all the trustees are U.S. residents
  • A corporation organized under the laws of the United States, any U.S. state, or the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, or the Commonwealth of the Northern Mariana Islands (with respect to the CNMI, refer to Revenue Ruling 80-167).

You perform the services on or in connection with an American vessel or aircraft and either:

  • You entered into your employment contract within the United States, or
  • The vessel or aircraft touches at a U.S. port while you are employed on it

You are working in one of the countries with which the United States has entered into a binational social security agreement (also known as Totalization Agreements), and the agreement provides that your foreign employment is subject to U.S. social security and Medicare taxes.

You are working for a foreign affiliate of an American employer under a voluntary agreement entered into between the American employer and the U.S. Treasury Department


Foreign Affiliates

A foreign affiliate of an American employer is any foreign entity in which the American employer has at least a 10% interest, directly or through one or more entities. For a corporation, the 10% interest must be in its voting stock. For any other entity, the 10% interest must be in its profits.

Form 2032, Contract Coverage Under Title II of the Social Security Act is used by American employers to extend social security coverage to U.S. citizens and residents working abroad for foreign affiliates of the American employers. Coverage under an agreement in effect on or after June 15, 1989, cannot be terminated.


Excludable Meals And Lodging

Social security tax does not apply to the value of meals and lodging provided to you for the convenience of your employer and excluded from your income.


Totalization Agreements (In General)

Under a Totalization Agreement, dual coverage and dual contributions (taxes) for the same work are eliminated. The agreements generally ensure that you pay social security taxes to only one country.

Covered by the United States only. If your pay in a foreign country is subject only to U.S. social security tax and is exempt from foreign social security tax, your employer should get a certificate of compliance from the Office of International Programs of the Social Security Administration.

Covered by foreign country only. If you are permanently working in a foreign country with which the United States has a social security agreement and, under the Totalization Agreement, your pay is exempt from U.S. social security tax, you or your employer should get a statement from the authorized official or agency of the foreign country verifying that your pay is subject to social security coverage in that country.

If the authorities of the foreign country will not issue such a statement, either you or your employer should get a statement from the U.S. Social Security Administration, Office of International Programs, at the address below. The statement should indicate that your wages are not covered by the U.S. social security system.

This statement should be kept by your employer because it establishes that your pay is exempt from U.S. social security tax.

Only wages paid on or after the effective date of the Totalization Agreement can be exempt from U.S. social security tax.

Generally, under these agreements, you will only be subject to social security taxes in the country where you are working. However, if you are temporarily sent to work in a foreign country, and your pay would otherwise be subject to social security taxes in both the United States and that country, you generally can remain covered only by U.S. social security. You can get more information on any specific agreement by contacting the United States Social Security Administration and/or the Social Security International Program Web site.


Preventing Double Payment of Social Security Taxes

To establish that your pay in a foreign country is subject only to U.S. social security tax and is exempt from foreign social security tax, your employer in the United States should write to the:

U.S. Social Security Administration
Office of International Programs
P.O. Box 17775
Baltimore, MD 21235-7775

Your employer should include the following information in the letter:

  1. Your name
  2. Your U.S. social security number
  3. Your date and place of birth
  4. The country of which you are a citizen
  5. The country of your permanent residence
  6. The name and address of your employer in the United States and in the foreign country
  7. The date and place you were hired
  8. The beginning date and the expected ending date of your employment in the foreign country

Telephone inquiries should be directed to the numbers shown on the following page: International Operations-Contact Us by Phone.

Your employer can request a Certificate of Coverage for his employees who work outside of the United States online at online certificate of coverage service.


Who Must Pay Self-Employment Tax?

If you are living abroad and you are a self-employed U.S. citizen or resident you generally are subject to the self-employment tax. This is a social security and Medicare tax on net earnings from self-employment of $400 or more a year. Your net self-employment income is used to figure your net earnings from self-employment.

Net self-employment income usually includes all business income less all business deductions allowed for income tax purposes. Net earnings from self-employment is a portion of net self-employment income. This amount is figured on Schedule SE. The actual self-employment tax is figured on net earnings from self-employment.


Effect of Foreign Earned Income Exclusion

You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the foreign earned income exclusion.


You are in business abroad as a consultant and qualify for the foreign earned income exclusion. Your foreign earned income is $95,000, your business deductions total $27,000, and your net profit is $68,000. You must pay self-employment tax on all of your net profit, including the amount you can exclude from income.

Puerto Rico, Guam, Commonwealth of the Northern Mariana Islands, American Samoa, or U.S. Virgin Islands

If you are a U.S. citizen or resident and you own and operate a business in Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, or the U.S. Virgin Islands, you must pay tax on your net earnings from self-employment (if they are $400 or more) from those sources. You must pay the self-employment tax whether or not the income is exempt from U.S. income taxes (or whether or not you must otherwise file a U.S. income tax return). Unless your situation is described below, attach Schedule SE to your U.S. income tax return.

If you do not have to file Form 1040 with the United States and you are a resident of:

  • Puerto Rico
  • Guam
  • The Commonwealth of the Northern Mariana Islands
  • American Samoa
  • The U.S. Virgin Islands

Figure your self-employment tax on either Form 1040-PR or Form 1040-SS, whichever applies.

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