When Social Security and Medicare Taxes Apply Outside of the United States
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 bilateral social security agreement (also known as a Totalization Agreement), 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 between the American employer and the U.S. Treasury Department
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.
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 can request a Certificate of Coverage for employees who work outside of the United States either online or by mail or fax.
Telephone inquiries should be directed to the numbers shown on the following page: International Operations-Contact Us by Phone.
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 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 report and pay self-employment tax on all your net profit.
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 report and pay 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
- The Commonwealth of the Northern Mariana Islands
- American Samoa
- The U.S. Virgin Islands
You must file these forms with the Internal Revenue Service Center, Austin, TX 73301-0215.
Individuals who have income from the U.S. territories mentioned above should consult Publication 570, Tax Guide for Individuals With Income from U.S. Possessions.