When are U.S. FICA taxes imposed on foreign earnings? U.S. Resident Taxpayers working outside the United States need to know the answer to this question.
FICA taxes are substantial. The tax rate is 15.3% for wages subject to the full tax. FICA taxes pay for Social Security and Medicare. Many persons working outside the United States pay in to these programs and never receive any benefit because they do not meet the requirement of paying in for 40 quarters of a year (ten years).
A large number of U.S. Resident Taxpayers work outside the country. The term U.S. Resident Taxpayer includes:
(1) U.S. Citizens;
(2) Citizens of other countries who obtain permanent residence status under U.S. immigration laws (Green Card Holders);
(3) Persons having a substantial physical presence in the United States who dont qualify for relief under the law or under tax treaty.
The tax rule for FICA taxes is different than the U.S. tax rule for income taxes.
It is important to understand how this works. First of all, U.S. Tax Residents who work for an American Employer are subject to FICA tax, even if the work for which the wages are paid are performed outside the United States.[1]
Second, any U.S. Tax Resident who is self-employed or works as an independent contractor is subject to FICA tax, even if the work generating the self-employment income is performed outside the United States.[2]
Third, it is only the wages of U.S. Tax Residents who work for Non American Employers that are exempt from U.S. FICA tax.[3]
Totalization Agreements
The U.S. has signed two-country agreements called Totalization Agreements with many countries that modify the rule above for workers qualifying for the benefit of the Agreement. Generally these agreements relate to workers that are temporarily in the other country (usually less than five years) and are working for employers from their home country. In such case the worker may be exempted from contributing to the government sponsored retirement program in the host country, provided that they continue to pay into the program in their home country. Sometimes these agreements provide other rules that may very the general rule stated above.
In addition, there are many persons and certain types of employment granted special status under the FICA taxes. These are the usual suspects who for one reason or another have particular clout with or appeal to members of Congress. The list includes: workers on ships and planes; temporary agricultural laborers; clergy and members of religious orders; government employees; students; and many others. You need assistance from a qualified practitioner to determine whether a special status may be available.
This article is intended as a general introduction to the tax rules described here. It is not intended as tax or legal advice applicable to the readers particular situation. You are encouraged to seek advice from a qualified practitioner.
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[2] Internal Revenue Code Section 1401.
[3] Internal Revenue Code Section 3121(c).
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