Yes, some U.S. expats may have to pay Social Security tax, but it depends on where they live, their employment status, and whether their host country has a bilateral Social Security agreement (also called a totalization agreement) with the United States. Totalization agreements are treaties between the U.S. and certain foreign countries designed to eliminate double taxation on social security taxes.
Here’s what you need to know to determine if you’re subject to U.S. Social Security and Medicare taxes while living abroad.
What is Social Security Tax?
Social Security tax, officially known as Old-Age, Survivors, and Disability Insurance (OASDI), funds Social Security benefits including retirement, disability, and survivor payments. It is a compulsory tax that is part of the U.S. payroll tax system, and typically includes Medicare taxes as well—together often called Social Security and Medicare taxes or FICA.
Employees pay 6.2% toward Social Security, and employers match it. Self-employed persons must pay both the employee and employer portions—a total of 12.4% for Social Security and 2.9% for Medicare, totaling 15.3%. Self-employed Americans must make quarterly estimated tax payments to cover self-employment tax.
Self-Employed Expats: Subject to U.S. Self-Employment Tax
If you’re self-employed abroad and your country does not have a totalization agreement with the United States, you are required to pay U.S. self-employment tax.
- The self-employment tax rate is 15.3% of your net income (12.4% for Social Security and 2.9% for Medicare).
- This tax applies even if you exclude your income under the Foreign Earned Income Exclusion (FEIE).
- Foreign tax credits and exclusions do not reduce your U.S. self-employment tax.
- The maximum amount of self-employment income subject to U.S. self-employment tax can change annually, for 2024 it is $168,600.
This is one of the most common traps for self-employed expats—assuming they are exempt from U.S. payroll taxes when they are not.
Self-Employed in a Totalization Country: Exempt
If you are self-employed in a country that has a totalization agreement (also known as a bilateral Social Security agreement) with the U.S., the agreement typically assigns Social Security taxation rights based on residency.
- You generally pay into your host country’s social security system.
- You are exempt from U.S. self-employment tax.
- You may need a certificate of coverage from the foreign country to prove your exemption. U.S. expats may need to obtain a certificate of coverage from their current country of residence to prove they are exempt from U.S. Social Security taxes under a totalization agreement.
Examples of countries with totalization agreements include Germany, France, Italy, Canada, the UK, Japan, South Korea, Australia, and others.
Foreign Employment and Host Country Tax Obligations
If a U.S. citizen is working abroad as an employee, whether for a U.S. company or a foreign employer, they are not subject to U.S. self-employment tax, because they are not self-employed as defined under IRC §1402.
In this case, their compensation is treated as foreign-sourced income, since wages are sourced based on where the services are performed, per IRC §861(a)(3) and Treas. Reg. §1.861-4(a). As such, even if employed by a U.S. company, the employee is subject to the tax laws of the host country where the work is physically performed.
To properly reflect this, a U.S. employer may stop withholding U.S. payroll taxes (including Social Security, Medicare, and income tax withholding) upon receipt of a valid Form W-8BEN, indicating that the employee is working and residing abroad.
The individual would then typically be liable for foreign income tax and social security contributions under the laws of the country in which they are performing services. This is not the same as a short-term assignment abroad under a U.S. payroll structure — this applies to expats whose residency and ongoing employment are fully based overseas.
How Can U.S. Expats Avoid Self-Employment Tax on Foreign Earned Income?
For U.S. expats living abroad, one way to avoid double taxation on Social Security tax is by restructuring how income is earned. Instead of reporting as a self-employed individual, an expat can form a foreign entity and pay themselves a salary as an employee. This allows the expat to take advantage of the Foreign Earned Income Exclusion (FEIE) under IRC §911, excluding this compensation paid from U.S. taxable income, assuming the required residency or physical presence test is met.
Why Does This Help Avoid Social Security and Medicare Taxes?
Under U.S. tax law, self-employed individuals are subject to self-employment tax (Social Security and Medicare) on net earnings from self-employment. By receiving a salary through a foreign corporation, expats avoid having that income classified as self-employment income, thereby eliminating their exposure to U.S. Social Security and Medicare taxes—also known as security tax. This strategy is particularly useful in situations where no totalization agreement exists between the U.S. and the host country, which can otherwise lead to dual social security taxation.
