U.S. Expats Taxes: Social Security Tax and Income Tax Withholdings
If you are employed by a US company but you work overseas, your employer may withhold income and social security taxes from your earnings. It may, though, be to your advantage to have your employer discontinue making these deductions, especially if you expect to qualify for the income exclusions afforded to you under the bona fide residence test or the physical presence test. Reference can be made to Publication 54 for more information in this regard.
When a US Employer does not deduct income taxes from your foreign earnings, or fails to deduct enough, you will most likely have to pay estimated tax. Estimating the tax is done by estimating your income tax and self-employment tax for the year, and then deducting the estimated withheld tax.
Gross income is then estimated by excluding the estimated taxes as described above. You may also deduct the estimated housing exclusion or deduction in this calculation. Be aware, though, that underestimating the housing amount may result in penalties for underpayment of the relevant taxes.
Estimated tax for Individuals is calculated using Form 1040-ES. This helps you estimate the tax due for a particular year and generally applies the same requirements for filing and paying estimated tax as you would if you were in the US.
Withholding tax from pension payments
If you are the recipient of any of the following types of benefits you would have to choose an exemption from the withholding of taxes on benefits paid to you:
- Employer-deferred compensation plans (for example, annuities, employer pensions and profit-sharing plans);
- Commercial annuities; and
- Individual retirement plans.
If you don’t choose an exemption, taxes will need to be withheld from these payments. The exemption can only be applied if you supply the payer of the benefit with proof of a US residence address, or US possession, or make a certified declaration to the payer that you are not a resident alien, or a US citizen, or a person who only left the US for the principal purpose of avoiding to pay US tax.
You will need to refer to Publication 575, “Pension and Annuity Income”, to see the rules that apply to non-periodic distributions from tax-sheltered annuity plans and qualified employer plans.
The Social Security Administration (SSA) is not required to withhold federal income tax on benefit payments paid to US recipients who live either in the US or in foreign countries. The recipients of benefits can, however, request voluntary income tax withholding. There is a complex set of rules that apply to the deduction of US income tax payable on these benefit payments, and the preference to voluntarily have income tax withheld, but this subject is too complex to cover here. You are advised to check with an experienced tax practitioner whether your SSA payments will be subject to income tax and whether it is advisable to request a voluntary withholding of income tax from these benefits.
You need to take note that not all foreign countries have tax treaties with the US, which means you may find your foreign income taxed in that country as well as in the US. You will need to investigate this carefully to be sure what applies to you in your set of circumstances.
US Social Security Taxes
Under normal circumstances an employee working for a company within the US will pay his share of social security taxes, and his employer will be liable for a share of taxes also. Even if that employee has to perform work on behalf of that employer in a foreign country, these social security taxes will still be payable. Some foreign countries may also require the employer to pay the social security taxes in a foreign country while the employee is working there.
If an American company is the principal owner of a foreign subsidiary company, its employees who work there may also be liable to pay foreign social security taxes. A ‘totalization agreement’, which is the social security equivalent of the tax treaties the US enters into with foreign countries is administered by the SSA and is valid to avoid double social security taxation.
As at 2018 the following foreign countries had totalization agreements with the US: Australia, Austria, Belgium, Canada, Chile, Finland, France, Germany, Greece, Ireland, Italy, Japan, South Korea, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. An agreement is pending with Poland. In some countries agreements have been signed but have not yet taken effect. These countries are Denmark, Mexico and Czech Republic.
In the situation where you work overseas for a company that is principally owned foreign subsidiary of a US company, or are directly employed by a foreign employer, you will not be liable for US social security taxes.
The Social Security Administration website, www.ssa.gov, will provide you with more information, or you can contact one of their representatives from details you’ll find under the ‘Contact Us’ tab.
Please, contact us with your questions in relation to U.S. Expats Taxes.
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