What Are Totalization Agreements and How Do They Affect Your US Expat Taxes?
If you live overseas, you may have heard of agreements between the United States and foreign countries known as Totalization Agreements. You may also have heard them being referred to as Social Security Agreements. For U.S. expats living and working abroad, it’s very important to know whether the United States has a Totalization Agreement with your host country and the details of such an agreement.
If you don't familiarize yourself with the details of an active Social Security Agreement, you may be stuck making Social Security contributions to two countries.
What Exactly Is a Totalization Agreement?
A Totalization Agreement is a convention between two countries preventing duplicate Social Security contributions for the same income. At this time, the United States has active Totalization Agreements with 30 countries. To check the complete list of social security agreement countries, take a look at the IRS list of Social Security Agreements. You will see that they are mostly with developed countries rather than emerging ones.
Totalization Agreements are extremely important because U.S. expats living and working overseas can face dual taxation when it comes to Social Security if such an agreement is not in place. They are especially important if you are self-employed. There are generally 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.
Under these agreements, dual coverage and dual contributions for the same work are eliminated. The agreements generally make sure that you pay social security taxes to only one country.
Generally, under these agreements, you will only be subject to social security taxes in the country where you are working. However, if you are temporarily sent to work in a foreign country and your pay would otherwise be subject to social security taxes in both the United States and that country, you generally can remain covered only by U.S. social security.
Difference Between Totalization Agreements and Tax Treaties
Tax Treaties are bilateral agreements between the United States and foreign countries to resolve tax issues such as double taxation and provide tax relief to citizens covered by these agreements.
While Tax Treaties cover many types of taxes, they do not include social insurance. Totalization Agreements deal with social security taxes, where the tax is paid, and how the credits earned are applied. Social security agreements with other countries save taxpayers from increased tax liability.
How a Totalization Agreement Affects Employed Individuals
Expats working for a foreign employer are generally exempt from Social Security and Medicare withholdings from their salary. Instead, they make contributions through the employer withholding to the resident country system (i.e. U.K. National Insurance, French Securite Social, or Singapore CPF). There is a difference, though, in how credits earned in the UK or France (countries with Totalization Agreements) and credits earned in Singapore (a country with no Totalization Agreement) can be applied in the future to qualify for Social Security benefits in the U.S.
Credits earned in the country with a Totalization Agreement can be transferred to the other party of the agreement (i.e. from the U.K. to the U.S. or vice versa) if a dual resident has an insufficient number of credits in one of the countries to qualify for the benefits. While transferred to the other country's Social Security system, those credits do not reduce the number of credits accumulated in the other country—so you may be eligible to collect social security benefits from both systems once you reach the retirement age.
Whereas credits accumulated in Singapore, or any other country not a party to the Agreement, may not be transferred. On a positive note, contributions made to the Singapore Central Provident Fund, or another country without Totalization Agreements may be applied instead of the foreign tax credit and thus reduce U.S. income tax amount.
How a Totalization Agreement Affects Self-Employed Individuals
Self-employed individuals are also exempt from double taxation by two Social Security systems. However, the country to which contributions have to be made is defined differently depending on the source of Social Security income, the length of self-employment activity (extended or incidental income). For some countries, it is defined by nationality rather than residency (i.e. Italian citizens make contributions to the Italian system while non-citizens residing in Italy make contributions to the U.S. Social Security system).
To be sure of the country to which you will make your contributions, make sure to 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.
Certificate of Coverage Instructions
If you are self-employed and would normally have to pay Social Security taxes to both the U.S. and the foreign country Social Security systems, you can establish your exemption from one of the taxes by writing to:
- If you reside in a foreign country, a certificate of coverage should be requested in the Social Security (National Insurance) office of that country. The address of the agency for your country can be found on the U.S. Social Security Administration website.
Be sure to provide the following information in your request:
- Full name
- Date and place of birth
- Country of permanent residence
- U.S. and/or resident country Social Security number
- Nature of self-employment activity
- Dates the activity was or will be performed
- Name and address of your trade or business in both countries
When you file a U.S. tax return and claim exemption through the Totalization Agreement, the Certificate of Coverage does not need to be attached if you e-file a tax return. However, you should procure such a certificate for each year where you claim exemption from the U.S. Social Security tax in case of the IRS verification request.