Expat Social Security and Taxes Explained
Taxes feel complicated enough when you’re an American citizen living and working on U.S. soil. They can feel downright overwhelming when you’re living and/or working abroad.
As an expat, it’s easy to forget about certain tax rules and restrictions – or even to be unaware of the rules altogether. Unfortunately, the IRS doesn’t give free passes out to people who claim ignorance. Either you follow the rules, or you don’t. And if you don’t, the IRS will take appropriate action.
In particular, expats need to be aware of how Social Security and other government benefits are handled – both in terms of paying taxes and receiving benefits.
Social Security and Medicare Taxes for Expats
As the IRS clearly explains on its website, “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:”
1. You’re working for an American employer, which includes: The U.S. Government; an individual who is a resident of the United states; a partnership in which at least two-thirds of the partners are U.S. residents; a trust where all of the trustees are U.S. residents; or a corporation that’s organized under the laws of the United States, any of the 50 individual states, the District of Columbia, the Virgin Islands, Guam, Puerto Rico, the Commonwealth of the Northern Mariana Islands, or American Samoa.
2. You’re performing services in connection with an American aircraft or vessel and either: (a) you enter into an employment contract with the United States, or (b) the aircraft or vessel touches at a U.S. port while you’re employed on it.
3. You’re working in a country with which the United States has entered into a binational Social Security agreement, and the agreement stipulates that your foreign employment is subject to U.S. taxes.
4. You’re working for a foreign affiliate of an American company under a voluntary agreement between the company and the U.S. Treasury Department. (A foreign affiliate of an American company is any type of foreign entity in which the American employer has a minimum of 10 percent interest. For corporations, the 10 percent interest has to be in its voting stock. For other companies, the 10 percent interest has to be in its profits.)
While that may all seem complicated, it’s not as confusing as it initially seems. As mentioned in the third section above, the United States has binational Social Security agreements with many developed nations. These are also known as totalization agreements, and they can dramatically simplify the tax picture for many expats.
Totalization Agreements
Without some sort of system in place, expats could potentially be exposed to double taxation – meaning they could be taxed by the American government, as well as the nation in which they’re residing and performing work. To eliminate this dual taxation for American citizens living over seas, the U.S. government participates in totalization agreements with the following 26 countries:
- Australia
- Austria
- Belgium
- Canada
- Chile
- Czech Republic
- Denmark
- Finland
- France
- Germany
- Greece
- Hungary
- Ireland
- Italy
- Japan
- Luxembourg
- Netherlands
- Norway
- Poland
- Portugal
- Slovak Republic
- South Korea
- Spain
- Sweden
- Switzerland
- United Kingdom
Further reading: How Do I Find the Right Expat Tax Advisor Near Me?
These totalization agreements exist to reduce dual coverage and taxation for the individuals working overseas, as well as to close gaps in coverage for people who reside in multiple countries.
While these agreements do relieve double taxation for expats in the aforementioned countries, many Americans still end up paying into both systems while only receiving a benefit from one.
Totalization agreements are based on territory rules, which essentially determines where the individual’s employment is sourced. Other factors like where an expat was hired and the intended length of stay can also come into play.
While there are always nuances and exceptions, the general rule of thumb is that individuals pay into the Social Security fund of their home country when they’re sent abroad on a contract and don’t plan on staying in excess of five years. In cases where there’s a long-term contract and the individual doesn’t have clear plans to return, they may pay into the Social Security fund of the host country.
Receiving Social Security Benefits When Retired Overseas
There are also some nuances involved in receiving Social Security benefits if you plan on living out your retirement overseas. Here are some noteworthy things to keep in mind:
- Payment of Social Security benefits are contingent upon your status of residency or citizenship, but can also be affected by the totalization agreements that are in place between the United States and the host country.
- Any U.S. citizen who has paid into Social Security is eligible to receive benefits. However, a non-U.S. citizen can become ineligible if they live outside of the U.S. for a total of 6 months (unless the country they’re moving to has an active totalization agreement with the U.S.).
- If you’re eligible for Social Security payments and you live in a country with an active totalization agreement with the U.S., your length of stay in your host country has no impact on your ability to receive benefits.
- The Social Security Administration refuses to send payments to American citizens living in North Korea or Cuba, regardless of the circumstances. If you’re living in one of these nations, you’ll have to leave the country in order to receive benefits.
- Make sure you’re aware of the impact Social Security benefits will have on your expat tax liability. Because these payments originate from the U.S., they can’t be claimed as part of your Foreign Earned Income Exclusion (FEIE). Roughly 85 percent of your benefits will be subject to taxation when you file U.S. expat taxes. It’s also possible that you’ll incur taxes in your host country.
Further reading: Understanding Social Security Taxes: Financing and Benefits with the SSA and IRS
Reporting an Expat Status
The Social Security Administration requires all U.S. citizens to report any significant life changes to their agency immediately. This includes a change of residence.
If an employer is sending you to work in a foreign country, it’s important that you work closely with them to ensure all financial paperwork is completed and filed in the appropriate fashion.
Can Foreign Spouses Receive Social Security Benefits?
While every situation is unique, some foreign spouses are eligible for spousal and survivor Social Security benefits. However, it’s important to understand that these rules are fluid and often undergo changes and new stipulations.
The basic rule is that any spouse who is not an American citizen or green-card holder can not receive Social Security Payments if they’ve been outside of the United States for six consecutive months. However, there are exceptions.
First off, non-citizens can receive benefits if they previously lived in the United States for at least five years as a married couple.
Secondly, if a spouse is a resident of countries that have totalization agreements, they can receive benefits.
As always, these rules are subject to change and should be verified with the Social Security Administration.
Find a U.S. Based CPA With Taxfyle
Expat social security, totalization agreements, benefits, exclusions…it can all get a bit complicated. And unless you have a background in tax law, you probably don’t want to navigate these issues alone.
Whether you’re filing your taxes as an expat for the first time, or you’ve been doing it for a decade, new changes in the tax code over the last couple of years make it more important than ever to partner with a certified professional.
At Taxfyle, we’re your one-stop online tax service. We can easily connect individuals and small businesses with licensed, on-demand CPA professionals who are ready and able to assist you in completing your return. Reach out today to learn more!
