US Social Security and Medicare taxes continue to apply to wages for services performed as an employee working outside of the United States if you are working for an “American employer”. Similarly, if you are abroad and you are a self-employed US citizen or resident you generally are subject to the so-called “self-employment tax”. Self employment tax is a social security and Medicare tax on net earnings from self-employment. You can learn more about self employment tax when working abroad from my blog posting here.
Many questions arise about US social security when one is working overseas. Some of these questions are: If you are working for an American employer, do you have to pay tax to both the US and the foreign host country’s social security systems? What happens if you are employed overseas but you are neither self-employed nor working for an American employer? If you do not have enough credits under the US social security system to qualify for benefits, does your work overseas “count” for purposes of US eligibility? If you already have enough credits under the US system to qualify for benefits, what happens with your foreign social security benefit credits — does the US count your foreign social security credits toward your US coverage?
Learn the answers in today’s blog posting.
The US has negotiated international Social Security agreements, called “Totalization Agreements,” with 30 countries. See the list here. Totalization agreements achieve two main goals: The first goal is to eliminate the possibility of double Social Security taxation. This situation can occur when a US citizen or US resident goes to work in a foreign country for an American employer and is required to pay Social Security taxes to both the US and the host foreign country on the same earnings. The second goal is to help ensure the protection of social security benefits for workers who have spent their careers working between the United States and a foreign country and who may lack sufficient coverage time in either country to qualify for either the US or foreign country’s social security benefits.
For those who are self-employed overseas, as discussed in my earlier blog post, US self-employment tax is imposed on the self-employment income. This remains the case even if the individual can claim the “foreign earned income exclusion”. However, Totalization Agreements between the United States and many foreign countries may prevent the individual from being subject to self-employment taxes in both countries.
The precise provisions of the relevant Totalization Agreement must be examined in order to understand how the rules may apply in the particular case.
Possibility of Dual Taxation
Since US citizens and residents must pay US Social Security taxes when working overseas for an American employer, many expatriates suffer double taxation because they are paying into both the US system and their host country’s social insurance program at the same time. While a Totalization agreement can relieve this burden of double taxation, many countries do not have such an agreement with the US and as a result, many individuals still pay tax into both the US and host country systems while working abroad.
Possibility of No Taxation
Similarly, Americans working overseas may be working in a country like the UAE, which has no social security system in place for individuals who are not UAE nationals. If this person is not working for an “American employer” and is not self-employed, he has no obligation to pay into a social security scheme. If you are working overseas for a non-American employer, please note, you may not make voluntary contributions to your Social Security account.
While this situation means the worker’s take home pay will be greater, he must not forget that old age catches up with everyone, and a savings plan for retirement should be put into place. Here, the expatriate must be very careful since it is quite easy to be led down a path of investing in offshore products that yield little more than terrible US tax consequences. Make sure you understand the US tax implications of any offshore product before you sign on the dotted line. We are happy to help. Read my US tax blog here that gives you some preliminary US tax cautions with respect to investing in offshore products.
Eligibility: Qualifying for US Social Security Benefits
The US Social Security program consists of many parts. It includes guaranteed income to individuals who have retired or who are disabled, as well as payments to qualified survivors; it provides insurance in the form of Medicare, and provides other benefits under numerous other programs. In order for you and your dependents or survivors to qualify for full benefits under each of the parts within the Social Security program, you must be “fully insured.” Generally, you need 40 quarters (10 years) of qualified earnings after the age of 21 in order to be “fully insured”.
What if a worker has some US coverage but not enough to fully qualify for benefits? If a Totalization agreement is in place, the periods of coverage that the worker has earned under the Social Security program of the host foreign country which is a party to the Totalization agreement may count toward his eligibility for US coverage. Similarly, a foreign country which is a party to an agreement with the US may take into account a worker’s coverage under the US Social Security program if this is necessary for the worker to qualify for that country’s Social Security benefits.
Generally, Totalization agreements will allow the US and foreign credits to be “totalized” only if the worker has at least six quarters of US coverage. Similarly, a worker may be required to have a minimum amount of coverage under the foreign social security system in order to be able to count his US coverage toward meeting the foreign country’s benefit eligibility requirements
If you have Social Security credits in both the United States and the other country, you may be eligible for benefits from one or both countries. If you meet all the basic requirements under one country’s system, you will get a regular benefit from that country. If you don’t meet the basic requirements, the Totalization agreement may, by combining credits from both countries, help you qualify for a partial benefit based on the proportion of your total career completed in the country that is paying the benefits.
Generally, Totalization agreements provide that if you already have enough credits under the US social system to qualify for a benefit, the US cannot count the other country’s credits.
The US Social Security Administration website has a special section devoted to international issues. It can provide you with useful and more detailed information.
Posted October 21, 2021
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