American expats are often all too familiar with the concept of double taxation. It is a hot topic at the forefront of many discussions regarding working overseas, and rightfully so. The Foreign Earned Income Exclusion and foreign tax credit are available to alleviate or eliminate dual income tax on wages earned by US citizens in a foreign country, but what about social tax on that income? If you are an American expat living and working in Germany, you’ll want to familiarize yourself with the US-Germany totalization agreement.
What Is the US Totalization Agreement with Germany?
The US has entered into totalization agreements with many countries to help avoid double social security taxation of the same earnings. The US-Germany totalization agreement exists to provide guidelines for determining whether an individual should be subject to social security tax in the US or Germany.
Where Will I Owe Social Tax—the US or Germany?
In most instances, if you are sent by your US employer to work in Germany for five years or less, then you and your employer will continue to pay US Social Security taxes. On the other hand, if you are sent to work in Germany for more than five years, or if you were hired in Germany, then you will pay into the German social system.
If you are self-employed and work only in the US or transfer your business to Germany for five years or less, you will continue to pay US Social Security taxes. If you are self-employed and work only in Germany or transfer your business to the US for five years or less, then you will pay into the German social system.
How Do I Obtain an Exemption from Social Tax?
Once you’ve determined where you should remit social tax, you’ll need to obtain a certificate of coverage issued by that country in order to serve as proof of exemption from social tax on the same income in the other country.
How Can I Apply for a Certificate of Coverage for Employees?
If you are an employee seeking an exemption from German social tax, your employer is required to request a certificate of coverage, or form USA/D 101, from the Social Security Administration. This process can be done either by mail or at the Social Security website.
If you are seeking an exemption from US Social Security, then your employer will need to request a certificate of coverage, or form D/USA 101, from the local German Sickness Fund that collects your German social taxes. The following information is needed in order to request the exemption:
- Full name of the worker;
- Date and place of birth;
- Country of worker’s permanent residence;
- US Social Security Number (or German Social Security Number if requesting a certificate from Germany);
- Date of hire;
- Country of hire;
- Name and address of the employer in the US and Germany; and
- Date of transfer and anticipated date of return.
I’m Self-Employed. How Does the US-German Totalization Agreement Affect Me?
Similar to the process for employees, self-employed individuals may write to either the US Social Security Administration or German Sickness Fund in order to request a certificate of coverage. Again, you will write to the country where you intend to continue paying social tax.
When submitting a request in writing, you’ll need to include the following information:
- Full name;
- Date and place of birth;
- Country of permanent residence;
- US and German Social Security Numbers, if both are applicable;
- Nature of self-employment activity;
- Dates the activity was or will be performed; and
- Name and address of your trade or business in both countries.
When Will the Certificate of Coverage Become Effective?
Generally, the certificate of coverage is effective as of the date you began working in the other country. In other words, it can be retroactive. We recommend requesting a certificate of coverage as soon as possible, preferably before work begins in the other country, to avoid double taxation.
What Are the Next Steps Once I Have Received the Certificate?
In the case of employees, certificates issued by Germany should be retained in your employer’s files in case of an audit by the IRS. Neither you nor your employer is required to submit a copy of the certificate to the IRS unless requested. On the other hand, self-employed individuals must attach a copy of the certificate from Germany to their US income tax return each year as proof of the US exemption from social (self-employment) tax. This step is crucial since self-employed individuals are generally subject to approximately 15% in self-employment tax with the filing of their US income tax return.
Certificates of coverage issued by the US are provided to both the employer and employee or self-employed individual. It is then your or your employer’s responsibility to ensure the certificate is provided to the German authorities when required.
You can read more about the US-Germany totalization agreement if you are so inclined. Though often overlooked, this agreement is a crucial tax planning opportunity for American expats in Germany.
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