How Totalization Agreements Affect US Expat Taxes

Totalization agreements US expat taxes

Are you an American citizen, resident, or green card holder about to move overseas? You’ll need to consider Social Security requirements and whether your new home country has a Totalization Agreement— especially if you’re a self-employed expat who intends to continue to work as self-employed while living and working abroad.

In this article, we will dive into what Totalization Agreements are, some general rules on how they are applied, and how they impact US expats living abroad. 

What is a Totalization Agreement? 

US expats must report their worldwide income to the IRS each year regardless of where they live. As a result, some end up in the dilemma of having to pay both US Social Security and the insurance system of their new home country. 

While expats employed by companies registered overseas (read: foreign employers) are generally not impacted by double taxation, self-employed taxpayers run the risk. That’s when Totalization Agreements come into play. 

A Totalization Agreement is a tax convention between the US and another country to determine how taxpayers should pay into & receive benefits from their respective social security systems when they have connections to both countries. 

The typical outcome: taxpayers avoid paying into both social security systems simultaneously, thereby avoiding double taxation on their Social Security contributions.

What makes a Totalization Agreement different from a traditional tax treaty? A treaty doesn’t include provisions related to social taxes. Totalization Agreements, however, directly handle Social Security taxes as an agreement independent from the tax treaty itself. For example, there are some countries such as Chile and Brazil that have a Totalization agreement in place with the US, but a general tax treaty otherwise does not exist.

Another goal of Totalization Agreements is to dictate benefit allocation and protection for American expats who have split careers across different countries. 

Here’s a complete list of the countries that have a Totalization Agreement with the US in 2022:

  • – 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
  • – United Kingdom
  • – Uruguay

If a country doesn’t have a Totalization Agreement with the US, you must pay US self-employment tax as a self-employed US taxpayer. And if you reside in a foreign country where you are also subject to taxation, you’ll likely pay social security taxes to both countries. 

How is a Totalization Agreement applied?

Not all totalization agreements are the same, and they vary from country to country. The factors that influence the rules of the totalization agreement include:

  • – Whether you’re employed or self-employed 
  • – How long you plan to stay in the new country 
  • – Whether you are covered under the social security system (and therefore able to obtain a certificate of coverage) 

A coverage certificate proves that the employee and employer are exempt from having to pay taxes to the foreign country. To get a certificate of coverage, you must submit a request to the Social Security Administration

Can self-employed US expats benefit from Totalization Agreements? 

Typically, self-employed US citizens must pay the following taxes, which the IRS refers to as self-employment tax (for the self-employed) or payroll tax (for those who are employed):

  • – 12.4% Social Security tax
  • – 2.9% Medicare tax

The rules for Totalization Agreements are a bit more complicated. While self-employed expats can also avoid double taxation, every Totalization Agreement has its own rules, generally based on these factors:

  • – The source of their self-employed income
  • – Their tax residency status
  • – Their nationality 
  • – How long they’ve been self-employed

The best advice for self-employed US expats is to consider whether the US has a Totalization Agreement with their new home country. That way, they can plan their time abroad and budget for taxes accordingly.

You Don’t Have to Figure Out Your Social Security Taxes on Your Own

Totalization Agreements aren’t easy to navigate, especially if you don’t have a tax background. That’s why it’s best to consult with an advisor to help figure out the best solution and to avoid paying Social Security taxes twice on the same income.

At Bright!Tax, we help our expat clients solve US tax challenges in various ways, whether it’s minimizing their Social Security taxes or filing their Report of Foreign Bank and Financial Accounts (FBAR) to the IRS. You can contact one of our CPAs to assess your tax situation and learn more about our services. 

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