If you are living abroad, you have may have heard the term ‘totalization agreements’ before. Basically, a totalization agreement is a US International Social Security agreement. Doesn’t ring a bell? Well, it’s very important as a US expat to understand what these agreements are and whether or not the US has one with your host country. Without such an agreement you may be forced to pay into both systems. David McKeegan provides an in-depth look at what these agreements are and how they may impact your US taxes.
Hi, everybody. My name is David McKeegan. I’m with Greenback Expat Tax Services. Our question today is “What are totalization agreements?”
These are basically the agreements that countries set up between each other to determine which country you should be paying social security into. Currently the United States has agreements with 24 countries. Most of them are developed countries; there aren’t too many for emerging market countries as of now.
These are important because individuals working overseas can be dual taxed on the Social Security side of things if there’s no agreement in place, or if they’re self-employed, even if there is an agreement in place the individual needs to check the agreement to see how that’s going to be handled in order to avoid being double taxed on the Social Security side of things.
The way these agreements generally work is that if you’re going to be overseas for a short period of time defined by three to five years or one to five years, then generally speaking you’ll pay into the social security system of your home country. If you don’t know how long you’re going to be overseas or you know it’s going to be over five years, then you will generally be required to pay into the social security system of your host country, so the foreign country you’re living in.
Now it’s very important to check the fine print on these agreements. For example, the US-UK agreement says that if you’re self-employed and you don’t want to pay into the United States system, the Social Security system, you only want to pay into the national insurance system, which is the UK system, that you actually have to volunteer or opt out of the United States Social Security system. If you don’t do that then you’re still required to pay into both systems, so it’s very important to have a look at these agreements.
If you’re self-employed and you’re working overseas you’re likely to be required to pay into the US Social Security system. If you’re working for a foreign corporation it’s less likely that you’ll be required to pay into the US Social Security system, but again you would need to check the treaty just to make sure, because you don’t want to find out three years of five years down the line that you should have been paying into the system all this time and now you get a big bill from Social Security. If you have any questions please let us know and we’ll be happy to help. Thank you.
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