How Do Totalization Agreements Affect Your Expat Taxes?
As an American living and working abroad, it’s essential to know whether the US has a totalization agreement with your host country. But first, you need to know why it matters. In this article, we’re going to look at totalization agreements and how they might affect your expat taxes.
Key Takeaways
- A totalization agreement is a multinational treaty that enables people who work in multiple countries to collect social security benefits from one or both of their home countries.
- Totalization agreements are often confused with tax treaties. While the two do have similar purposes, they also have notable differences.
- Tax treaties are designed to prevent double taxation. However, they deal with income taxes rather than social security.
What Is a Totalization Agreement?
Totalization agreements, also known as social security agreements, are international treaties that establish rules for which countries should receive an expat’s social security contributions. This protects US expats from having to pay social security tax to their host country and the US—a form of double taxation.
For example, let’s say Matt Expat moves to Austria to take a job. As a US citizen, he must contribute to the US Social Security system even while he lives abroad. As an employee of an Austrian company, he is also required to contribute to the Austrian social security system. This means that Matt would have to pay a social security tax twice from the same employment income.
Fortunately, depending on the details of his employment, the US-Austrian totalization agreement would clarify which system he should contribute to—rather than requiring that he contribute to both.
For Matt to be subject to US social security tax, there need to be certain circumstances, such as his working for a US employer abroad. When this happens, he would be subject to both Social Security taxes in the host country and the US. If there is a totalization agreement in place, then double taxation would be avoided.
However, the risk of double taxation remains for Americans living and working abroad in countries without totalization agreements. In addition to this, some agreements only cover certain types of employment income. This means that some Americans working abroad may still be required to contribute to two different systems.
US Totalization Agreement: Country List
Currently, the United States has active totalization agreements with 30 countries.
- 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
- The United Kingdom
- Uruguay
If your country of residence is on this list, you may be able to reduce your tax liability using the rules laid out by the relevant totalization agreement. However, totalization agreements can get tricky. We always recommend getting advice from an expat tax professional when navigating the complex topic of social security taxation.
No matter where you live, always keep accurate and up-to-date records of all your earnings and social security contributions. This information can make all the difference when claiming benefits or filing taxes.
Totalization Agreements: How They May Reduce Your Taxes
If the country you reside in has a totalization agreement with the US, it could have a major impact on your tax obligations. Let’s look at how totalization agreements affect employed and self-employed Americans living abroad.
What a Totalization Agreement Means for Expat Employees
The details of US totalization agreements vary from country to country. However, most totalization agreements have the following rules for employees:
- If a US company assigns you to work in another country for less than five years, you will pay into the US Social Security system.
- If the assignment exceeds five years, you will pay into the host country’s social security system.
- If you are working for a non-US employer in another country, you will pay into the host country’s social security system.
It isn’t always one or the other, though. Expats can contribute to—and earn credits from—both social security systems at different times or for separate income streams. These credits will then count toward your social security coverage in both countries.
For example, let’s say that Cindy moves to Italy, which has a totalization agreement with the US. Because her work plans change over the years, she ends up paying into both the US and Italian social security systems at various times.
When Cindy is ready to retire in Italy, she discovers she doesn’t have enough Italian credits to qualify for social security benefits in Italy. However, she can use her US credits to supplement her Italian credits, allowing her to qualify.
Her US credits are not reduced through this process, either. In this example, Cindy’s US social security credits would remain the same even after she “transferred” them to Italy. As a result, she may be entitled to social security benefits from both the US and Italian governments.
If you ever consider moving back to the US or to another country, be aware of what that means for your social security contributions and future benefits. Some totalization agreements allow you to “export” your social security benefits if you move back to the US or to another country that has a similar agreement.
What a Totalization Agreement Means for Self-Employed Expats
As with expat employees, self-employed expats must pay a social security tax on their income. Because this tax is typically higher than it is for employees, totalization agreements are even more important for anyone who is self-employed.
Unfortunately, the rules for self-employed expats vary even more widely than for employees. This can make it difficult to know precisely how you should pay your social security tax—and to whom. In most cases, the answer will depend on one or more of the following factors:
- The source of your income
- How long you’ve been self-employed
- Your nationality
- Your tax residency status
Regardless, self-employed expats can also earn social security credits in both countries. These credits can then be applied to both systems.
Please note that if you are a business owner, a totalization agreement could remove the requirement of withholding and reporting social security contributions for your employees.
Totalization Agreements vs. Tax Treaties
Totalization agreements are often confused with tax treaties. While the two do have similar purposes, they also have notable differences. So what is a tax treaty, and what makes it different from a totalization agreement?
Tax treaties focus on preventing double taxation, but they differ from totalization agreements in that they deal with income taxes rather than social security. A tax treaty between a country and the United States establishes which country has the right to tax a specific source of income.
However, it’s important to note that tax treaties don’t typically cover social security contributions, meaning that expats residing in a treaty country may still face double taxation on social security without a totalization agreement in place.
The Social Security Administration website offers online tools to help you estimate your future benefits, including those from totalization agreements. You can use these to help plan your finances.
Have Questions about Totalization Agreements? We’re Here to Help!
We hope this guide has helped you understand how totalization agreements can affect your expat taxes. If you still have questions, we have answers.
At Greenback Expat Tax Services, we help Americans around the world file their expat taxes accurately and on time. If you’re ready to be matched with a Greenback accountant, click the “Get Started” button below. For general questions on US expat taxes or working with Greenback, you can contact our Customer Champions.
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