Americans living abroad still need to file US tax returns. They may also still need to pay social security taxes. Social Security totalization agreements between two countries govern where you must pay social security tax. Without a totalization agreement, US expats may end up having to make social security contributions in two countries.
Fortunately, the United States has totalization agreements with many expat hubs, which means that Americans living overseas can avoid this kind of double taxation. When your residence country doesn’t have a totalization agreement with the US, you may be able to claim the Foreign Tax Credit for the foreign contributions.
In this Guide to Social Security Totalization Agreements, we cover:
- What Is A Social Security Totalization Agreement?
- What Is The Difference Between A Tax Treaty And A Totalization Agreement?
- What Countries Have Totalization Agreements With The US?
- The Benefits Of Totalization Agreements
- How Self-Employed Individuals Benefit From Totalization Agreements
- What Is A Social Security Certificate Of Coverage?
- Can Expats Choose In Which Country To Pay Social Security Taxes?
- How To Qualify For Social Security Benefits When Working Abroad
- What If Your Country Doesn’t Have A Totalization Agreement With The United States?
- Are You Eligible For Social Security Totalization Agreement Benefits?
Let’s get started.
What Is A Social Security Totalization Agreement?
A Social Security Agreement is a bilateral agreement between two countries that determines where you will pay social security taxes. You might also hear them referred to as Totalization Agreements or International Social Security Agreements.
In short, a social security totalization agreement can help protect US persons overseas or US inbound expats from having to make social security contributions in more than one country on the same income.
It provides procedures for the worker to obtain an exemption from the other country where they are liable to pay social security as well.
This system also protects workers’ benefits to receive social security income when they divide their careers between the US and another country.
A variety of situations can result in Americans abroad owing social security taxes in more than one country. For example, self-employed US expats frequently owe social security taxes in two countries. (More on this later).
What Is The Difference Between A Tax Treaty And A Totalization Agreement?
In short, tax treaties deal with income tax, totalization agreements deal with social security:
- Income tax treaties determine which country can tax your social security income.
- Totalization agreements determine where you should pay social security taxes or make contributions.
As you can see, while they may initially seem similar, they serve very different purposes. Before claiming a totalization agreement or a treaty benefit, remember that each agreement and tax treaty is unique and requires analysis.
Moreover, it is important to understand the complete agreement or treaty, not just a few paragraphs to deduce the result. You should not take any single paragraph of a treaty by itself. Because of this, working with a tax expert is usually the best option.
Keep in mind that while income tax treaties and totalization agreements are usually the most useful for Americans overseas, other types of treaties, such as the Germany-US Estate and Gift Tax Treaty, do exist and can help alleviate double taxation in other situations.
What Countries Have Totalization Agreements With The US?
Currently, the US has 30 totalization agreements with countries around the world. And fortunately for Americans abroad, many of them are popular expat destinations, including most of Western Europe.
Here’s a list of countries with Social Security Agreements with the United States:
- Australia
- Austria
- Belgium
- Brazil
- Canada
- Chile
- Czech Republic
- Denmark
- Finland
- France
- Germany
- Greece
- Hungary
- Iceland
- Ireland
- Italy
- Japan
- Luxembourg
- Netherlands
- Norway
- Poland
- Portugal
- Slovak Republic
- Slovenia
- South Korea
- Spain
- Sweden
- Switzerland
- United Kingdom
- Uruguay
Please note that the US has totalization agreements with some countries that it has no tax treaty with. This means that even if your country of residence doesn’t have a tax treaty with the US, you should still check for a totalization agreement.
The Benefits Of Totalization Agreements
Totalization agreements can be a key part of expat tax optimization. However, the specifics of how a social security agreement can help you will depend on where you owe social security taxes.
Each totalization agreement is different, however, they generally state:
- If a US taxpayer is sent by a US company to work in a foreign country for five years or less, then the taxpayer will remain under US Social Security.
- If a US taxpayer is sent by a US company to work in a foreign country for more than five years, then they should pay social security taxes in the foreign country.
- If a US taxpayer is already living abroad and then hired by a US company or a foreign company, then they should pay social security taxes in the foreign country.
Special rules apply if the foreign employer is an affiliate of a US company. When this happens the US employee may be able to continue contributing to US Social Security.
As you can imagine, this protection from double taxation can help Americans overseas save significantly on taxes.
In countries that don’t have a totalization agreement with the United States, US taxpayers may end up having to pay into both countries’ systems. This is a common issue for US taxpayers living in countries such as Singapore, Hong Kong, Costa Rica, and Panama.
How Self-Employed Individuals Benefit From Totalization Agreements
Social security taxes affect self-employed and employed individuals. However, self-employed expats are more likely to be subject to dual social security tax because they are still covered under the US system, even when living and doing business abroad.
At the same time, if they are living and working in a foreign country, the foreign country may require that they pay into the local social security system.
Fortunately, there is good news for American freelancers and solopreneurs abroad: In some situations, totalization agreements may exempt self-employed US persons from paying into the US system.
The Social Security Agreement between the US and Spain is one example of this. The agreement says that if you are a self-employed expat in Spain and are paying into the Spanish system, you do not need to pay self-employment tax in the United States.
Nevertheless, self-employed Americans in Spain still need to notify the IRS that they are paying social security in Spain by obtaining a certificate of coverage from the Spanish authorities.
The situation is similar for Americans in Canada. With the US-Canada Social Security Agreement, you generally will only pay self-employment tax to the country you are residing in while self-employed, though you will need to obtain a certificate of coverage from the local Canadian office to show the IRS if requested.
(As a quick reminder, although self-employed US expats need to pay social security even when living abroad they can reduce US social security taxes by forming an LLC and electing S Corp status. But make sure you understand how your residence country taxes a US LLC.)
What Is A Social Security Certificate Of Coverage?
A Certificate Of Coverage (COC) is an official form issued by a government social security agency. It certifies that you are subject to social security in the country that issued the form (so you are “covered” in that country). Hence, you can get an exemption from social security coverage in the other country.
For example, a US taxpayer in the UK is required to pay UK social security contributions under the US-UK social security agreement. They will need a COC from the UK authorities to prove exemption from paying social security to the US for the period covered.
How do I get a US certificate of coverage?
US taxpayers can request a certificate of coverage online through the Social Security Administration website.
Can Expats Choose In Which Country To Pay Social Security Taxes?
Typically, a totalization agreement will determine where you must pay social security taxes. You usually cannot choose.
Still, exceptions exist.
For example, the Italy-US agreement has different rules that allows US citizens who are long-term residents in Italy to only pay into the US system.
How To Qualify For Social Security Benefits When Working Abroad
To start, we recommend checking how long you have been contributing to the US social security system.
To receive US social security distributions, US taxpayers need to pay into the system for at least 40 quarters (this is equivalent to ten years of contributions). If you are close to this 40-quarter mark, it may be worth continuing your contributions until then so that you can receive US social security distributions upon retirement.
Furthermore, if you want to qualify for social security disability, 20 credits need to be earned within the last 10 years (exceptions apply for younger taxpayers).
What if a US taxpayer has some US coverage but not enough to qualify for the benefits?
The US Social Security Administration will then count periods of coverage that would have been earned under the foreign country’s system and vice versa. This is how the totalization agreement framework provides benefits protection to some extent.
If the combined credits in the two countries (totalization) enable the worker to meet eligibility requirements, a partial benefit can then be paid, based on the proportion of total career completed in the paying country.
However, the agreement allows to totalize only if the worker has at least six quarters of US coverage.
Planning Tip: Expats can still contribute to and apply for social security, even without US income. To do so you must show income on schedule C and pay self-employment tax on this income. There is a minimum amount of income that should be included to get this benefit. Please speak to a tax advisor to make sure you qualify.
Next, you should consider your long-term plans and where you would like to retire. If you plan to stay and retire in the foreign country, it may be easier for you to receive a pension there. Though this shouldn’t be the only deciding factor as US Social Security can make direct deposits in many countries.
However, if your long-term plan is to return to the United States, your best choice will likely be to continue to contribute to US Social Security.
What If Your Country Doesn’t Have A Totalization Agreement With The United States?
If your country of residence doesn’t have a social security totalization agreement with the United States, then your next step will depend on the foreign country.
In some cases, a foreign country may let you opt-out of social security plan if you demonstrate that you are paying into a foreign plan.
For example, US expats in Hong Kong who meet certain requirements do not have to contribute to Hong Kong’s Mandatory Provident Fund.
Still, be sure to consult with a local accountant or tax attorney in that country before making a decision.
If it is not possible to get an exemption or opt-out of the foreign plan, then you may need to pay the foreign social security tax and then claim the Foreign Tax Credit on your US return. In these situations, the social security tax of that country is considered an income tax for Foreign Tax Credit purposes.
American taxpayers who are facing social security taxes in two countries may need to work with a US expat tax accountant and a foreign accountant for tax relief.
Are You Eligible For Social Security Totalization Agreement Benefits?
Many American taxpayers are unaware that they could potentially save money with a social security totalization agreement. Unfortunately, totalization agreements are highly nuanced and technical documents. Understanding whether you are eligible and how the agreement applies to you is complex.
Before utilizing a totalization agreement, we recommend speaking to our team of experienced expat tax advisors.
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