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Social Security Totalization

International Social Security agreements, also known as “Totalization agreements,” came into the picture due to globalization and migration (permanent or temporary) of workforce between several countries.

The objective of this International agreement is:

  • to eliminate double Social Security taxation
  • benefit protection for workers who have divided their careers between the United States and another country.

The Problem of Dual Coverage:

Those who works in multiple countries are covered by systems of those many countries simultaneously. And this is when the Social Security taxes are paid as many times as the countries in which the person is moving.

The MNCs takes the burden of this additional tax by the means of Tax Equalization and land up in paying 65-70% of excess taxes in the form of Social Security.

This problem in with both – expatriates and repatriates:

There is misconception about U.S. agreements is that they allow dually covered workers or their employers to elect the system to which they will contribute. This is not the case. The agreements, moreover, do not change the basic coverage provisions of the participating countries’ Social Security laws–such as those that define covered earnings or work. They simply exempt workers from coverage under the system of one country or the other when their work would otherwise be covered under both systems.  

Territoriality Rule:

Under this basic “territoriality” rule, an employee who would otherwise be covered by both the U.S. and a foreign system remains subject exclusively to the coverage laws of the country in which he or she is working. 

Detached-worker Rule:

Under this “detached-worker” exception, a person who is temporarily transferred to work for the same employer in another country remains covered only by the country from which he or she has been sent. The detached-worker rule in U.S. agreements generally applies to employees whose assignments in the host country are expected to last 5 years or less.

The detached-worker rule can apply whether the American employer transfers an employee to work in a branch office in the foreign country or in one of its foreign affiliates. However, for U.S. coverage to continue when a transferred employee works for a foreign affiliate, the American employer must have entered into a section 3121(l) agreement with the U.S. Treasury Department with respect to the foreign affiliate.

Italian Agreement–An Exception:

If a U.S. citizen who is employed or self-employed in Italy would be covered by U.S. Social Security absent the agreement, he or she will remain covered under the U.S. program and be exempt from Italian coverage and contributions.   

Self-Employment Rules:

U.S. Social Security coverage extends to self-employed U.S. citizens and residents whether their work is performed in the United States or another country. As a result, when they work outside the United States, citizens and residents are almost always dually covered since the host country will normally cover them also.

Certificates of Coverage:

Workers who are exempt from U.S. or foreign Social Security taxes under an agreement must document their exemption by obtaining a certificate of coverage from the country that will continue to cover them. For example, a U.S. worker sent on temporary assignment to the United Kingdom would need a certificate of coverage issued by SSA to prove his or her exemption from U.K. Social Security contributions.

When SSA issues a certificate certifying U.S. coverage, a copy of the certificate usually must be presented to the appropriate foreign authorities as proof of entitlement to the foreign exemption for the U.S. employee and the employer. When the other country issues a certificate certifying that the employee is covered by the foreign system, the employer can immediately stop withholding and paying U.S. Social Security taxes on the employee’s earnings. The certificate should just be retained in the employer’s files so it can be produced in the event the Internal Revenue Service ever questions why no taxes are being paid for the employee.

A self-employed U.S. citizen or resident must attach a photocopy of the foreign certificate to his U.S. tax return each year as proof of the U.S. exemption from self-employment taxes. In accordance with Revenue Procedure 84-54, the foreign certificate serves as proof of the exemption from U.S. Social Security taxes for the period shown on the certificate.

Employers generally are required to request certificates on behalf of employees they have transferred abroad; self-employed persons request their own certificate. Certificates of U.S. coverage may be requested by writing to the address at the end of this article.

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