To eliminate dual taxation with respect to Social Security and Medicare taxes, the United States has entered into international agreements (known as “Totalization Agreements”) with 25 foreign countries. Totalization Agreements exempt wages from Federal Insurance Contributions Act (FICA) taxes including social security taxes and Medicare taxes, if an individual's earnings are subject to taxes or contributions for similar purposes under the social security system of a foreign country. A similar exemption exists from Self-Employment Contributions Act (SECA) taxes.
IRC Section and Treasury Regulation:
IRC Section 3101(c)
IRC Section 3111(c)
IRC Section 1401(d)
Rev. Proc. 80-56 (IRS RPR), 1980-50 I.R.B. 21, 1980-2 C.B. 851, 1980 WL 128476
Rev. Proc. 84-54 (IRS RPR), 1984-28 I.R.B. 11, 1984-2 C.B. 489, 1984 WL 260548
Revenue Ruling 92-9, 1992-1 C.B. 344.
Totalization Agreements eliminate dual social security coverage (the situation that occurs when a person from one country works in another country and is required to pay social security taxes to both countries on the same earnings). Each Totalization Agreement includes rules intended to assign a worker's coverage to the country where the worker has the greater economic attachment. The agreements generally ensure that the worker pays social security taxes to only one country, provided the worker and the employer meet the procedural requirements under the agreement for obtaining an exemption from the other country’s social security taxes.
If a worker is temporarily transferred to work for the same employer in another country, the worker remains covered only by the country from which he/she has been sent. This is known as the “Detached Worker” Rule.
If an American employer sends an American citizen or resident alien to work in a foreign country that does not have a Totalization Agreement with the United States, the American employer and the employee are generally liable to pay social security taxes to both countries. However, when an American employer sends an American citizen or resident alien to work in a foreign country with which the United States has a Totalization Agreement, relief from dual social security taxes is provided. In general, the Totalization Agreements state:
- If an American citizen or resident alien is sent to a foreign country for five years or less to work for the same American-based employer, he or she would generally remain covered by the U.S. Social Security system.
- If the same taxpayer was sent abroad for longer than five years, he or she would pay social security taxes to the foreign country.
- If the taxpayer is employed by a foreign employer or was hired by an American-based employer while living overseas, he or she would pay social security taxes to the foreign country. (If the foreign employer is an affiliate of an American employer, the American employer can enter into an agreement under section 3121(l) to have United States social security coverage for the services of United States citizens and United States residents performing services for the foreign employer.)
Conversely, if an alien employee was sent from a foreign country to work in the United States the same principles would generally apply.
- If the alien employee is sent by a foreign employer to work in the United States for five years or less, he or she would generally remain covered by the foreign country’s social security system.
- If the same taxpayer was sent to the United States for longer than 5 years, he or she would pay social security and Medicare taxes to the United States.
- If the alien employee worked for an American-based employer or was hired by a foreign employer while living in the United States, he or she would pay U.S. Social Security and Medicare taxes.
How does an employer substantiate the claim?
Substantiation of a claim of exemption under the terms of a Totalization Agreement can be obtained by an American citizen or resident alien or his or her employer through a request for a Certificate of Coverage from either the country in which the employee is employed or the country of residence.
Covered by the United States only. If wages paid in a foreign country are subject only to U.S. Social Security tax and are exempt from foreign social security tax, the employer should get a Certificate of Coverage from the Office of International Programs of the Social Security Administration.
Covered by foreign country only. If the employee is an alien who wishes to claim an exemption from U.S. Social Security taxes and Medicare taxes because of a Totalization Agreement he/she must secure a Certificate of Coverage from the social security agency of his home country and present such Certificate of Coverage to his employer in the United States, according to the procedures set forth in Revenue Procedures 80-56, 84-54, and Revenue Ruling 92-9.
If the employee is a U.S. citizen or U.S. resident alien and they are working in a foreign country with which the United States has a Totalization Agreement, and under the Totalization Agreement, pay is exempt from U.S. Social Security tax, the employee or employer should get a statement from the authorized official or agency of the foreign country verifying that the wages are subject to social security coverage in that country.
If the authorities of the foreign country will not issue such a statement, either the employee or the employer should get a statement from the U.S. Social Security Administration, Office of International Programs. The statement should indicate that the wages are not covered by the U.S. Social Security.
This statement should be kept by the employer because it establishes that this employee’s 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.
Listing of Foreign Countries with Which the United States Has Bilateral Social Security Agreements
There are 25 countries that have entered into Totalization Agreements with the United States. Click on Totalization Agreements to see a list of those countries, the agreements effective date, and additional information regarding each agreement the U.S. has entered into.
Issue Indicators/Audit Tips:
- Forms W-2 provide potential leads for individuals claiming a FICA exception. In the pre-audit stage, review Forms W-2 to ascertain if income is reported, but no SS wages were withheld.
- Ascertain whether U.S. citizens or resident aliens are performing services for the employer abroad. If so, ascertain whether the wages are excluded from FICA taxes and have the employer explain the reason for exclusion.
- Ascertain whether the employer employed resident aliens in the U.S. If so, ask whether the wages paid to the resident aliens are excluded from FICA taxes and have the employer explain the basis for exclusion.
- If necessary, request a Certificate of Coverage for each worker claimed to be exempt.
- Obtain and analyze the applicable Totalization Agreement.
- If an American citizen or resident alien is sent to a foreign country for five years or less to work for the same American-based employer, you must determine the length of time overseas to determine whether the wages are exempt.
- Ask whether the employer has filed a Form 2032, Contract Coverage under Title II of the Social Security Act, an agreement under section 3121(l) making the employer liable for FICA taxes with respect to services of United States citizens and residents working for an affiliated foreign entity outside the United States.