Are there Self-Employment Taxes for Businesses Abroad?

Are there Self-Employment Taxes for Businesses Abroad?

Self-Employment Taxes for Businesses Abroad

When a person who works in the United States is self-employed they become subject to employment taxes as both the employer and the employee – which generally means they will pay double employment tax as opposed to working for somebody else as an employee. When a person is self-employed in a foreign country, there is the concern that they may be paying into two (or more) different employment tax systems open – which is completely unfair. As a result, the United States has entered into nearly 30 totalization agreements with certain foreign countries. While the totalization agreements vary a bit depending on which country the agreement is worth, the overall goal is to minimize self-employment and other related taxes. Let’s take a brief look at totalization agreements.

Totalization Agreements

Totalization Agreements: A totalization agreement is designed to avoid U.S. persons (or foreign persons working in the U.S.) from paying double-tax on social security. The U.S. has entered into more than 20 totalization agreements worldwide, including Australia and the UK. It is especially important for U.S. persons who are self-employed and working in a foreign country to confirm if the country has a totalization. Likewise, it is equally important for foreign persons to confirm with the IRS whether they must also pay into the U.S. tax system for social security.

As provided by the IRS:

      • “The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes.

      • These agreements must be considered when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country.”

How the IRS Summarizes Totalization Agreements

As further provided by the IRS:

      • “Since the late 1970’s, the United States has established a network of bilateral Social Security agreements that coordinate the U.S. Social Security program with the comparable programs of other countries. This article gives a brief overview of the agreements and should be of particular interest to multinational companies and to people who work abroad during their careers.

      • International Social Security agreements, often called “Totalization agreements,” have two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.

      • Agreements to coordinate Social Security protection across national boundaries have been common in Western Europe for decades. Following is a list of the agreements the United States has concluded and the date of the entry into force of each. Some of these agreements were subsequently revised; the date shown is the date the original agreement entered into force.”

List of Totalization Agreement Countries

The list of countries that the United States has entered into totalization agreements with is listed below for your reference:

      • Australia

      • Austria

      • Belgium

      • Canada

      • Czech Republic

      • Chile

      • Denmark

      • Finland

      • France

      • Germany

      • Greece

      • Ireland

      • Italy

      • Japan

      • Luxembourg

      • Netherlands

      • Norway

      • Poland

      • Portugal

      • Slovak Republic

      • South Korea

      • Spain

      • Sweden

      • Switzerland

      • United Kingdom

In conclusion, totalization agreements are international social security agreements between the US and foreign countries to minimize double-taxation for social security.

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