International Aspects of U.S. Social Security and Unemployment Taxes analyzes the U.S. Social Security tax rules that apply to aliens working in the United States, and to U.S. citizens and certain aliens working in foreign countries. Written by Thomas St.G. Bissell, Esq., this Portfolio also discusses exemptions or relief from the U.S. Social Security tax that may be available under a social security “totalization” agreement between the United States and a foreign country or under a U.S. income tax treaty.
There is also an examination of certain ways in which U.S. citizens and aliens working abroad may qualify for exemption or relief from the social security taxes imposed by foreign countries under a social security totalization agreement, under a U.S. income tax treaty, and/or under the internal foreign tax credit rules of certain foreign countries.
In addition, this Portfolio discusses U.S. income taxation of U.S. and foreign social security benefits under U.S. domestic law and under the various U.S. income tax treaties.
International Aspects of U.S. Social Security and Unemployment Taxes also takes a look at the federal unemployment tax rules applicable to aliens working in the United States and citizens working abroad. Also discussed are procedures concerning the payment of U.S. Social Security and unemployment taxes, and the filing of applicable returns.
Worksheets for this Portfolio include a Social Security Administration table summarizing the status of social security totalization agreements and pertinent Social Security Administration regulations.
International Aspects of U.S. Social Security and Unemployment Taxes allows you to benefit from:
This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 90 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource service offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in more than 40 foreign countries, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.
Detailed Analysis
I. Scope of this Portfolio
II. Principal Features of the U.S. Social Security System
A. The Social Security Act
B. Structure of the Social Security Tax
1. General
2. The FICA System
a. "Employee"
b. "Wages"
c. No Deductions Allowed; "Accountable Plan" Rules
d. Deductibility of FICA for Income Tax Purposes
3. The SECA System
a. "Trade or Business"
b. Adjustments to Gross Income
c. SECA Tax Rate
d. Annual De Minimis Test
e. Return-of-Capital Income Versus Services Income
4. Nonelective Features of Both FICA and SECA
5. Administration of the Tax System
C. Benefits Payable Under the Social Security System
1. Eligibility for Benefits
2. Principal Types of Benefits
3. Nonpayment of Benefits to Certain Individuals Abroad
D. No-Refund Feature of the Social Security Tax
III. Immigration Rules on Employment of Aliens
A. General
1. Visa Categories
2. Non-Visa Categories
B. Immigrant Aliens
1. Intentions Regarding Employment
2. Work Outside the United States
IV. Liability for U.S. Social Security Tax - General Discussion
A. Tax Minimization as an Objective
B. Determination of Whether Individual Is Exempt from Tax
2. Treaty Exemptions from Tax
3. Credit or Deduction Under Foreign Income Tax Law
4. Outline of Subsequent Discussion
V. Special Rules on Fringe Benefits and Deferred Compensation
B. Fringe Benefits Exempt from FICA
1. Employee Business Expenses
2. Other Fringe Benefits
C. Fringe Benefits Exempt from SECA
D. Deferred Compensation - FICA
E. Deferred Compensation - SECA
VI. Coverage or Exemption Under the Code
A. Nonimmigrant Aliens - FICA
2. "Territorial" Basis of FICA
a. General Rules
b. Nonresident Aliens
c. Services Performed Both Within and Without the United States
d. Definition of "United States"
3. Aliens Working in the United States But Not in a U.S. Payroll System
a. Visiting Aliens Exempt from Income Tax Under the Code or Tax Treaty
b. "Split Payroll" Arrangements for Aliens Working Full-Time in the United States
c. Payment of FICA by Alien Employee Himself
d. Accrual of Quarters of Coverage Even Though No FICA Is Withheld by the Foreign Employer
4. Alien Employees Based in the United States Who Make Foreign Business Trips
5. FICA Rules Applicable to Nonimmigrant Visa Categories
a. A-Visas (Employees of Foreign Governments, etc.)
(1) Direct Employees of Foreign Government
(2) Employees of Foreign Government Instrumentality
(3) Personal Servants of A-Visa Holder
(4) Spouse and Children of A-Visa Holders
b. B-Visas (Business Visitors and Tourists)
c. C-Visas (Transit Aliens)
d. D-Visas (Crew Members of Ships and Aircraft)
e. E-, I-, L-, O-, P-, and TN-Visas (General Working Visas)
f. Students Holding F-, J-, M-, or Q-Visas
g. G-Visas (Employees of International Organizations, etc.)
(1) Employees of an International Organization
(2) Foreign Government Employees
(3) Personal Servants of the Above
(4) Spouse and Children of G-Visa Holders
h. H-Visas (Temporary Workers and Trainees)
i. Teachers, Trainees, and Other Non-Students Holding J- or Q-visas
j. R-Visa (Religious Workers)
k. Other Visas
(1) Special Family Visas (K- and V-Visas)
(2) "Protective" Visas
l. Non-Visa Categories
m. Illegal Aliens
B. Nonimmigrant Aliens - SECA
2. "Residence" of a Nonimmigrant Alien for U.S. Income Tax Purposes
3. Source of Self-Employment Income Immaterial
4. Distinction Between Income from Services and from Capital
5. Self-Employment Income from Services
b. B-Visas (Business Visitors)
d. D-Visas (Crew Members)
g. G-Visas (Employees of International Organizations and Their Personal Servants)
i. Teachers, Trainees, and Other Non-Students Holding J- or Q-Visas
n. Special Categories
(1) Aliens Working Abroad
(2) Board of Directors' Fees
6. Self-Employment Income from Invested Capital
7. Incidental Services Income Subject to SECA
8. Delinquent Payment of SECA
C. U.S. Citizens Working Abroad - FICA
1. Services Performed Abroad for "American Employer"
b. Effect of "Check-the-Box" Regulations and the "Anti-Inversion" Rules
2. Services Performed Abroad for "Foreign Affiliate" of an "American Employer"
a. General Requirement
b. Split Payrolls and Potential Duplicate FICA Coverage
c. Relation of FICA Election to Employee Benefit Plans
d. Procedural Requirements
e. Deduction for FICA Paid by the Electing American Employer
f. Applicability of § 482
g. Imputed Income to Employee and/or Additional FICA Due
h. Special Compliance Problems
i. Planning to Avoid FICA Coverage
3. Services Abroad for an Employer Not an "American Employer" or a "Foreign Affiliate"
a. General
b. "Common Law Employee" of an American Employer
c. Citizen Sent to Totalization Country
d. Possible Self-Employed Status for the Citizen
e. FICA Coverage on U.S. Business Trips
f. "Moonlighting" for a Company Subject to FICA
g. Making a Capital Investment Subject to SECA
h. Benefit Effects of Losing Social Security Coverage
D. U.S. Citizens Working Abroad - SECA
1. Earned Income
2. SECA on Income from Invested Capital
3. Employees of Foreign Governments and International Organizations
4. Delinquent Payment of SECA
E. Immigrant Aliens - FICA
F. Immigrant Aliens - SECA
2. Employees of Foreign Governments and International Organizations
3. Delinquent Payment of SECA
VII. Social Security Totalization Agreements
1. Relief from Double Social Security Tax
2. "Totalization" of Benefits
3. Other Features of Totalization Agreements
4. Totalization Agreements in Effect
5. Where to Find Totalization Agreements
6. Section 409A Rules Not Applicable
B. Substantive Provisions in the Totalization Agreements
1. "Standard" Agreements
a. Employees
b. Self-Employed Individuals
c. Special Arrangements to Vary Agreement
2. Italian Agreement
c. Special Arrangements
3. Power to Impose Social Security Tax
4. Identifying Rules that Apply
C. Application of Substantive Rules
1. Nonimmigrant Aliens
2. U.S. Citizens
3. Immigrant Aliens
D. Procedural Matters
1. U.S. Citizens and Immigrants Transferring Abroad
a. Application to SSA for U.S. "Coverage Certificate"
b. Content of Application
2. Individuals Seeking Exemption from U.S. Tax
3. Problem of Retroactive Coverage Certificates
E. Special Problems Common to All Agreements
1. "Local Hires" Who Change Jobs Within the Host Country
2. Employment by a Foreign Affiliate
3. Transfers from Third Countries
4. Split Payrolls
5. Transfer from the United States to a Foreign Entity Not Covered by FICA
6. Special Problems of the Five-Year Rule
a. Flexibility in Applying the Test
b. Extension of Time After Five Years Elapse
c. Start of New Five-Year Period
d. Running of Five-Year Period when a New Agreement Takes Effect
e. Transfers from Third Countries
7. Transfers Between Entities with No Common Ownership
8. Issuance of "Exemption Letter" or "Coverage Letter" by SSA
9. Employees Working on Vessels and Aircraft
10. Aliens Who Maintain "Voluntary" Home Country Coverage
11. Obtaining FICA Coverage for Nonimmigrants Who Transfer Abroad
F. Special Problems Under Particular Agreements
1. Canadian Five-Year Test
2. French and Japanese Medical Insurance Rule
3. Servants Working in Germany
4. Dutch "Moonlighting" Rule
G. Planning to Minimize Social Security Tax
H. Taxes Not Covered by Totalization Agreements
1. U.S. Taxes Not Covered
2. Foreign Taxes Not Covered
VIII. Income Tax Treaty Exemption from Social Security Tax
A. Introduction
B. Explicit Exemption
C. Implicit Exemption as Result of Income Tax Exemption
2. Arguments for and Against the FICA Exemption
3. FICA Exemption Not Applicable to Employer's Tax
4. Arguments for and Against the SECA Exemption
a. Self-Employment Income Is Exempt Under a Treaty
b. Individual Reclassified as a Nonresident Alien Under a Treaty
5. Accrual or Denial of Quarters of Coverage
6. IRS Enforcement Where a Treaty Exemption May Be Available
7. Individuals Entitled to Treaty Exemptions
D. Nonimmigrant Aliens
1. General Treaty Rules
2. Exemption from FICA
a. Temporary Business Visitors
b. Teachers
c. Students
d. Researchers
e. Trainees
f. Foreign-Government Employees
3. Exemption from SECA
a. Temporary Workers
f. Foreign Government Workers
E. U.S. Citizens
F. Immigrant Aliens
2. FICA Exemption
3. SECA Exemption
IX. Liability for Foreign Social Security Tax
B. Exemption Under Social Security Totalization Agreements
C. Exemption Under Foreign Law or Income Tax Treaty
D. U.S. Income Tax Relief from Foreign Social Security Tax
1. Foreign Tax Credit Relief
2. Deduction of Foreign Social Security Taxes
E. Section 409A Rules Inapplicable to Foreign Social Security Systems
X. Taxation of U.S. and Foreign Social Security Benefits
A. Taxation Under the Code
1. U.S. Social Security Benefits
a. Paid to U.S. Citizens and Resident Aliens
b. Paid to Nonresident Aliens
2. Foreign Social Security Benefits
B. Taxation Under the Approach in the 2006 U.S. Model Income Tax Treaty
2. U.S. Social Security Benefits
3. Foreign Social Security Benefits
4. Treaties That Contain "Virtual" Model Treaty Language
C. Other Treaty Variations
1. Taxation Only in Country of Residence
2. Taxation Only in Country of Residence, but with No Saving Clause Exception
3. Taxation Only in Source Country, but with Lmited Saving Clause Exception
4. Both Countries May Tax
5. Neither Country May Tax
6. Treaty Is Silent
XI. Federal Unemployment Tax (FUTA)
A. Structure of Tax
1. FUTA Definitions
2. Credit Against FUTA for Qualifying State Taxes
3. Deductibility of FUTA
4. Self-Employed Individuals Excluded from FUTA
5. State Unemployment Taxes ("SUTA")
B. Individuals Not in a U.S. Payroll System
C. Nonimmigrant Aliens
1. Territorial Principle of FUTA
2. Entitlement to Unemployment Benefits
3. Aliens Exempt from Income Tax - Avoidance or Payment of FUTA
4. Applicability of FUTA by VISA Category
a. A-Visas (Foreign Government Employees, etc.)
g. G-Visas (International Organization Employees and Their Servants)
D. U.S. Citizens
E. Immigrant Aliens
F. Lack of Treaty Exemptions
1. Income Tax Treaties
2. Social Security Totalization Agreements
G. Double Unemployment Tax Relief Between the United States and Canada
XII. Tax Payments and Tax Return Filing Procedures
Introductory Material
A. FICA
1. General Observations
2. General Requirements if Employment Is Subject to Tax
a. Employer and Employee Identification Numbers
b. Taxpaying and Filing Requirements on Employer
c. Penalties Imposed on Employer for Noncompliance
(1) Interest on Underpayment
(2) Penalty for Late Deposit of Tax
(3) Civil Penalty for Failure to File Form 941
(4) Civil Penalties for Failure to File Forms W-2 or W-3
(5) Penalty for Nonpayment of Tax
(6) 100% Penalty for Failure to Withhold
(7) Civil Penalties for Negligent or Fraudulent Underpayment
(8) Criminal Penalties
d. Overpayments of FICA
(1) Employee with Two or More Employers
(2) Employee with Only One Employer
e. FICA Requirements Imposed on Employees
3. Nonimmigrant Aliens
b. Filing Requirements on Employer
c. Requirements Imposed on Employees
d. Aliens Claiming Income Tax Treaty Exemption from FICA
4. U.S. Citizens
b. Employees of "Foreign Affiliates"
c. Common Law Employees
5. Immigrant Aliens
6. Exemption Under a Totalization Agreement
B. SECA
1. General Requirements if Self-Employment Income Is Subject to Tax
a. Taxpayer Identification Number
b. Taxpaying and Filing Requirements
c. Penalties for Noncompliance
(1) Interest on Underpayments
(2) Civil Penalties for Failure to File Schedule SE
(3) Civil Penalty for Nonpayment of Tax
(4) Accuracy-Related Penalty
(5) Civil Penalty for Fraudulent Underpayment
(6) Criminal Penalties
d. Overpayments of SECA
e. Filing Requirements on Person Paying Service Fee to Self-Employed Individual
f. Erroneous Treatment of an Individual as Self- Employed
2. Nonimmigrant Aliens
a. Self-Employed Nonresident Aliens
b. Self-Employed Resident Aliens
3. U.S. Citizens Abroad
4. Immigrant Aliens
5. Exemption Under a Totalization Agreement
C. FUTA
1. General Requirements if Employment Is Subject to Tax
a. Employer Identification Number
c. Penalties for Underpayment of Tax
(3) Civil Penalty for Failure to File Form 940
(4) Civil Penalty for Nonpayment of Tax
(5) Civil Penalty for Negligent or Fraudulent Underpayment
d. Overpayment of FUTA
2. Aliens and Citizens
Working Papers
Table of Worksheets
Worksheet 1 Status of Totalization Agreements, as prepared by the Social Security Administration October 1, 2008
Worksheet 2 20 CFR Sections 422.101-107, Social Security Administration Regulations Relating to the Issuance of Social Security Cards to Aliens
Worksheet 3 20 CFR § 404.1918, How Benefits Are Computed [under a Social Security Totalization Agreement]
Worksheet 4 Computation of U.S. Pro Rata Benefit Amounts Under a Social Security Totalization Agreement
Bibliography
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Statutes:
Treasury Regulations:
IRS Announcements and Notices:
IRS Procedures and Rulings:
Cases:
UNOFFICIAL
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