What is a Social Security Totalization Agreement?

Totalization agreements are the bilateral Social Security agreements between the United States and other countries that eliminate dual Social Security taxation of earnings and provide additional benefit protection for employees who divide their careers between the Unites States and other certain other countries. The 25 such countries are Austria, Australia, Belgium, Czech Republic, Canada, Chile, Denmark, France, Finland, Greece, Germany, Italy, Ireland, Luxembourg, Japan, Norway, Netherlands, Portugal, Poland, Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom.

U.S citizens working abroad

When employers transfer employees abroad to work for an American company, they are subject to pay into the American Social Security system in addition to paying a social security tax in the country where they work that results in dual Social Tax liabilities. Totalization agreements provide an exemption to this whereby the worker will be subject only to the social security ax laws of the country where he or she is working. Employers are required to request a Certificate of Coverage issued by SSA on their behalf, which should be retained in the company’s files to produce as proof of entitlement in the event the IRS question why they have not paid any taxes for that worker. The company can then immediately stop withholding and paying U.S Social Security taxes establishing the fact that another country’s system covers the employee. In other words, a U.S citizen working in any one of the 25 countries (excluding Italy) that have entered into agreements is exempt from coverage and continues to be covered by the U.S Social Security.

Aliens working in the U.S

In the case of foreigners working in the U.S if they wish to claim an exemption from U.S taxes under the totalization agreement they must obtain a Certificate of Coverage as evidence of exemption from their home country’s social security agency. They should then present the Certificate to the employer in the United States who must retain a copy of it. This Coverage Certificate is effective retroactively to the starting date of employment.

Self-employed US citizens working abroad

According to the Revenue Procedure 84-85, freelance or independent U.S. citizens or residents living abroad must request their certificate and prove exemption from U.S self-employment Social Security taxes for the period shown on the certificate by attaching a copy of the foreign certificate to the U.S tax return each year.

U.S citizens who have worked abroad and in the U.S

U.S workers who have divided their careers between a foreign country and the United States sometimes may not have worked long or recently enough to qualify for retirement, pensions or disability insurance benefits from one or both countries. Under the totalization agreement, such people may be eligible for partial U.S or foreign social security benefits if they have “insured status requirements”, i.e., at least, six quarters of U.S coverage and a minimum coverage under the overseas system. Thus, the combined or “totalized” coverage credits from both countries would enable the workers to meet the eligibility requirements. The partial benefit would depend on the proportion of the person’s entire career completed in the paying country.

Totalization agreements are beneficial both for those whose working careers are over and for those who are currently working. For current workers, it avoids the dual taxation. For those whose working careers are over and have divided their professional life between the United States and a foreign country it results in partial payment of benefits, which they otherwise would not have been entitled. Companies with personnel abroad can reduce their cost of doing business overseas by taking advantage of this agreement.

About the author...

Joshua Katz, CPA

After working for several accounting large firms, I founded Universal Tax Professionals because I knew I could give expats more personalized services at lower rates. Feel free to email me directly at josh@universaltaxprofessionals.com.

Joshua Katz, CPA