Totalization Agreements

Totalization Agreements

What is a Totalization Agreement?

Taxpayers who are considered to be employees in foreign countries generally do not have to pay into the United States tax system for social security. Rather, they pay into the foreign social security jurisdiction. But, this is not always the case, and there are some exceptions and limitations. For the most part, if the U.S. person goes overseas and works in a foreign country then they pay into that foreign country’s social security system.  The problem stems from the fact that sometimes a taxpayer is self-employed and then may have to pay into multiple social security agreements — unless a totalization agreement works to eliminate the double taxation issue.

Common issues involving a social security/totalization agreement include:

    • Is there a Totalization Agreement with the Country

    • Which country does the Taxpayer pay into?

    • Is the Taxpayer Self-Employed?

    • Do any Exceptions apply?

    • Has the Employee been employed for more than 5 years?

Being self-employed does not mean that the Taxpayer has a ‘business,’  per se — it could just be that the Taxpayer is considered an independent contractor and have their own 1-person consulting company for example. But, when a person is an independent contractor or self-employed then they are responsible for both the employer and the employee’s portion of Social Security.

Being self-employed does not mean that the Taxpayer has a ‘business,’  per se — it could just be that the Taxpayer is considered an independent contractor and have their own 1-person consulting company for example. But, when a person is an independent contractor or self-employed then they are responsible for both the employer and the employee’s portion of Social Security.  The question then becomes if a U.S. person works overseas and is self-employed, do they have to pay into one Social Security system or both Social Security systems? The answer lies in whether or not there is a totalization agreement between the United States and the foreign country. For example, a self-employed taxpayer working in Australia typically will only pay into the Australian Social Security equivalent system, whereas a taxpayer who is working nearby in New Zealand may have to pay into both systems because there is no totalization agreement between the United States and  New Zealand. Let’s walk through the basics of the totalization agreement.

What is a Totalization Agreement?

A totalization agreement is an agreement between the United States and a foreign country on issues involving double taxation for Social Security taxes. If the United States has entered into a totalization agreement with a foreign country, then as long as the taxpayer meets the requirements to qualify or to be eligible under the totalization agreement, the taxpayer is not required to pay into both social security systems. For example, if a U.S. person operates their own company and lives in the United States, presumably they would pay into the U.S. social security system. Alternatively, if the taxpayer works overseas and is self-employed they would pay into the foreign social security system. To prevent the U.S. person who is self-employed and working abroad to pay into both social security systems, various totalization agreements have been entered into with ~25 countries.

Where the lines can start to blur, is for example when a U.S. person works in a foreign country where there is a totalization agreement — but that person works for a U.S. employer in that foreign country. For these more specific/complex types of situations, it is very important to refer to the actual totalization agreement to best understand the specifics of that agreement because there are some nuances between the agreements in different countries, especially depending on whether it is an older agreement or a newer agreement.

As provided by the Social Security Administration:

Introduction to Totalization Agreements

      • Since the late 1970’s, the United States has established a network of bilateral Social Security agreements that coordinate the U.S. Social Security program with the comparable programs of other countries. This article gives a brief overview of the agreements and should be of particular interest to multinational companies and to people who work abroad during their careers.

      • International Social Security agreements, often called “Totalization agreements,” have two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.

      • Agreements to coordinate Social Security protection across national boundaries have been common in Western Europe for decades. Following is a list of the agreements the United States has concluded and the date of the entry into force of each. Some of these agreements were subsequently revised; the date shown is the date the original agreement entered into force.

Which Countries Have Totalization Agreements

Countries with Social Security Agreements
Country Entry into Force
Italy November 1, 1978
Germany December 1, 1979
Switzerland November 1, 1980
Belgium July 1, 1984
Norway July 1, 1984
Canada August 1, 1984
United Kingdom January 1, 1985
Sweden January 1, 1987
Spain April 1, 1988
France July 1, 1988
Portugal August 1, 1989
Netherlands November 1, 1990
Austria November 1, 1991
Finland November 1, 1992
Ireland September 1, 1993
Luxembourg November 1, 1993
Greece September 1, 1994
South Korea April 1, 2001
Chile December 1, 2001
Australia October 1, 2002
Japan October 1, 2005
Denmark October 1, 2008
Czech Republic January 1, 2009
Poland March 1, 2009
Slovak Republic May 1, 2014
Hungary September 1, 2016
Brazil October 1, 2018
Uruguay November 1, 2018
Slovenia February 1, 2019
Iceland March 1, 2019

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.