Teaching Abroad and Social Security Taxes
More and more people are accepting opportunities to work overseas. People working in the field of education as grade school teachers or college professors are often presented with a fantastic opportunity to teach abroad. Depending on the employer and location of the services, this transition could result in some unexpected tax consequences. The impact could felt now or much later on down the line. When an educator accepts a foreign assignment, they will either be working for a US employer or a foreign employer. The tax consequence differs depending on the employers.
How a US Employer Affects Teaching Abroad and Social Security Taxes
Let’s examine working for a US employer.
If an educator takes a role with a US employer working abroad in a country with no totalization agreement with the US, then the employee could be subject to double taxation. An employee in this position would pay social security taxes to both the US and the foreign country. In the short term, this is going to result in a smaller paycheck for the employee.
Teaching abroad can result in a pay cut since the cost of your employment is more to the employer as well. The double coverage might not sound like such a bad thing if you can benefit in the US and the foreign country in the future. However, this is often not the case, since most social security systems have eligibility requirements to qualify for benefits. If you don’t meet the criteria, then the payment made to the foreign social security program is lost, and you will never see any benefits. It is essential to understand both the cost of the foreign social security program and the requirement to receive a benefit later.
For those that accept short-term contracts, contributions to the foreign system are often lost. On the plus side, the social security tax paid to the foreign country can be claimed as a part of the Foreign Tax Credit. Claiming the tax paid can be a valuable tax saver based on the availability of the Foreign Earned Income Exclusion (FEIE). For some, using tax credit could be more advantageous based on their unique tax situation. Another plus is that you will get credit under the US social insurance system. As a note, there are locations in which there is no social security tax or which you wouldn’t be required to make contributions, so you would only pay into the US system.
How a Foreign Employer Affects Teaching Abroad and Social Security Taxes
Now let’s say that you decide to take the opportunity abroad working for a foreign employer. An employee of an international company will not be required to pay US social security, so you will only make one payment to the foreign country’s social security program, if applicable. In some cases, this may seem more desirable, but beware: you could run into the same problem that someone working for a US employer would. The problem is not being eligible for benefits in the future. If you aren’t eligible for benefits, then the money paid in the foreign system is lost, so for that period abroad, you have no tax credits. Your period abroad could either mean not meeting the eligibility requirement to receive benefits or reduced US benefits.
Before accepting the opportunity, you should review your US benefits to determine what your monthly benefits would be. For younger workers, this might not be important if they spend most of their career abroad, but again, this could mean no US Social Security benefits. For a mature worker, this could limit benefits or eliminate them if they don’t have enough credit, and there may be little time left to recoup. Again, the foreign social security tax paid can go toward a foreign tax credit, so this would be valuable in reducing the US income tax currently.
The US Social Security program currently does have challenges, and its future isn’t clear. So regardless of the employer that you work for or the location in which you work, it would be worth looking into additional retirement options such as an IRA in which you have more control in the direction of the investment.
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