Do Expats Pay into Social Security?
With so many other things to consider when moving abroad, it’s easy to forget about Social Security taxes. However, this is a topic every expat should be well-versed on. Understanding how Social Security works for expats is essential to remaining tax-compliant and protecting your retirement income.
This article will explain the top facts you should know about tax treaties, how to pay Social Security, and the effects on your working overseas tax.
Key Takeaways
- If you are employed by a US employer, you ARE required to pay social security taxes.
- If you are self-employed, you will generally be required to pay a self-employment tax, which covers the Social Security and Medicare taxes you would generally split with a US employer.
- Whether you are employed by a US employer or self-employed, these rules can often lead to double taxation. The US has Totalization Agreements with several countries (listed below) to avoid this.
- Even if the country you live in has no totalization agreement with the US, you can still reduce (or even erase) the income tax portion of your US tax bill by using the Foreign Earning Income Exclusion or the Foreign Tax Credit.
- Social Security Tax Payments count towards the credits needed to earn social security benefits regardless of where you live and work.
Do Americans Working Overseas Pay Social Security Taxes?
The answer to this depends on the details of your employment.
- If you are employed by a US employer, you will generally be required to pay into US Social Security, regardless of where you live and work.
- If a foreign employer employs you, you will generally NOT be required to pay into US Social Security.
- If you are self-employed, you will generally be required to pay a self-employment tax, which covers the Social Security and Medicare taxes you would generally split with a US employer.
If you are employed by a US employer or self-employed, these rules can lead to double taxation. This is because your country of residence will likely impose its own social security tax on the same income. As you receive payment, you will be paying social security taxes twice—once to each government.
To prevent this, the US has entered into totalization agreements with a number of countries around the world.
What Are Totalization Agreements?
A totalization agreement is a treaty between the US and another country that outlines which social security system employees are required to pay into. This protects expats from having to pay into both systems at once.
Currently, the US has active totalization agreements with 30 countries. Those countries are:
- 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 the country you call home is on this list, you can shield yourself from double taxation. If not, you may end up having to pay social security taxes to both the US and your country of residence.
Even if the country you live in has no totalization agreement with the US, you can still reduce your US tax bill by using the Foreign Earning Income Exclusion or the Foreign Tax Credit. Consult a qualified tax professional to learn more.
Social Security Taxes for Self-Employed Expats
As mentioned above, self-employed expats (including business owners and digital nomads) are required to pay a self-employment tax. The rate for this tax is 15.3% of your business profits, which is a combination of the standard Social Security and Medicare taxes that an employer and employee would split. (12.4% for Social Security and 2.9% for Medicare = 15.3%.)
If you live in a country with a US totalization agreement, you may be able to exempt your income from the self-employment tax and pay social security taxes only to your country of residence. However, you cannot use the Foreign Earned Income Exclusion or Foreign Tax Credit to erase your self-employment tax.
Social Security Payments Are Also Taxable
Once you begin receiving Social Security payments, a portion of those payments will be considered taxable income (up to 85%, to be precise). This is true regardless of whether you retire in the US or abroad. And because your Social Security payments are derived from a US source, they cannot be excluded from taxation using the Foreign Earned Income Exclusion, which only applies to foreign-source income.
Because of the complex nature of Social Security while living abroad, it’s always recommended to consult with a tax professional for expat tax advice.
Still Have Questions about Your Social Security? We Are Here to Help!
We hope this guide has helped you understand what Social Security taxes you can expect while working overseas. If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
