When it comes to U.S. income taxes, the basic expat tax rule is quite clear and straightforward. U.S. citizens living abroad are required to annually file and pay income taxes on worldwide income, just like U.S. citizens residing in the United States.
When it comes to U.S. social security taxes, however, the rules are more nuanced and depend on a number of variables, including your location, your employer, and the type of income you earn.
In this blog, we clear up the rules on social security taxes for U.S. expats by exploring different scenarios that are typically relevant for U.S. citizens living and working abroad.
Are expats required to pay US social security taxes?
In general, U.S. social security and Medicare taxes apply to U.S. expats with respect to: (1) income received from self-employment over $400, and (2) wages for services received as an employee outside the United States under the following scenarios:
- You are working for an American employer.
- You are working in one of the countries with which the U.S. 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.
- 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.
What rates apply to US social security taxes?
For employees outside the United States who fall under one of the above categories, U.S. social security and Medicare taxes can be up to 7.65% of your salary (in 2020). The breakdown between the two taxes is 6.2% for social security (on wages up to $137,700 in 2020) and 1.45% for Medicare on all your wages.
U.S. expats who are self-employed are required to pay both the employer and employee share of social security and Medicare taxes, which amount to a rate of up to 12.4% social security tax and 2.9% Medicare tax, on earnings over $400.
An Additional Medicare Tax applies in both scenarios for U.S. expats whose income exceeds certain thresholds ($200,000 for single filers and $250,000 for married joint filers). A U.S. employer must withhold Additional Medicare Tax on wages it pays to you in excess of $200,000 for the calendar year, regardless of your filing status and regardless of wages or compensation paid by another employer.
Is there a risk of double social security taxation?
As with income taxes, U.S. expats do face a certain risk of double taxation when it comes to social taxes. Unfortunately, in the case of social taxes, certain domestic benefits like the foreign earned income exclusion are not applicable. So, for instance, 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.
To avoid paying social taxes in both the U.S. and the foreign country, you can rely on a bilateral social security agreement between the U.S. and the foreign country, known as a “Totalization Agreement.” The terms of these agreements may vary from country to country.
When a totalization agreement is not available, U.S. expats should consider consulting with a tax specialist to identify structures that reduce or eliminate U.S. social security taxes. These include, among others, setting up a local (non-US) corporation to pay you a salary (that would not be subject to U.S. social security or Medicare tax but may trigger other income tax implications associated with controlled foreign corporations) or setting up an S corporation to pay you a combination of dividends and salary (whereby only the salary portion would be subject to U.S. social security and Medicare taxes).
Any decision you make should take into consideration how your ability to receive future social security payments is affected.