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Self-Employed Expats Beware: Avoid double taxation

Self-Employed Expats Beware: Avoid double taxation
Ines Zemelman, EA
05 October 2021

Social Security Coverage of Self-Employed

If you live overseas, you may have heard of agreements between the United States and foreign countries known as Totalization Agreements

It is especially important to read those documents carefully if you are self-employed. There are specific rules about self-employment and Social Security and it’s important to understand all the details if you are in countries with social security agreements with the United States.

 How Totalization Agreements Allocate the Country of Coverage

The details of the agreement vary among the countries. Some countries (i.e. United Kingdom) begin coverage of U.S. nationals once they establish a tax home in the UK. The self-employed residents are covered by UK National Insurance instead of the U.S. Social Security from the first year of work.

Whereas self-employed U.S. expats residing in Germany remain covered by the U.S. Social Security system and pay their contributions to the U.S. system if they normally work in the U.S. but transfer business activity to Germany for five years or less. If they intend to live and work in Germany for more than five years - they are covered by the German system.

For self-employed individuals working in Italy, the selection of coverage depends on citizenship status. Dual nationals of the U.S. and Italy may elect the country of coverage. The U.S. nationals who are non-citizens of Italy remain under the U.S. Social Security coverage and continue paying Self-employment taxes on their income earned in Italy to the U.S. Social Security system.

Can I Choose the Country of Coverage?

Depending on individual preferences, self-employed U.S. expats occasionally elect the country of coverage that does not conform with the Totalization Agreement rules. This is not allowed. As a result, you may end up paying social contributions retroactively to both countries and miss the tax saving benefits granted to you by the Totalization Agreement.

To be sure of the country to which you will make your contributions, check with the agreement that is in place (if any) between the United States and the foreign country in which you’re living and working.

If you have questions, our team can assist even with complex scenarios (i.e. you work in a country with a Totalization Agreement but you are a national of a third country - please schedule a tax planning session to avoid costly mistakes. 

Ines Zemelman, EA
Founder of TFX