U.S. Citizens Abroad and Social Security

By Carter, Leonard H. | The CPA Journal, January 1994 | Go to article overview

U.S. Citizens Abroad and Social Security


Carter, Leonard H., The CPA Journal


The collapse of the communist system in Eastern Europe has encouraged many professionals to open offices in the former eastern bloc. Issues arise about the obligation of U.S. citizens abroad for Self-Employment tax (SECA) and Social Security tax (FICA).

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. 312(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. 312(I)].

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.

PROBLEMS

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 and 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 ate 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. …

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