PORTFOLIO

International Aspects of U.S. Social Security and Unemployment Taxes (Portfolio 6830)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this Portfolio, our expert authors analyze the U.S. Social Security tax rules that apply to U.S. citizens and aliens working in the United States, and to U.S. citizens and aliens working in foreign countries. 

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DESCRIPTION

The International Aspects of U.S. Social Security and Unemployment Taxes Portfolio 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.

The Portfolio examines 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. In addition, the 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.

This Portfolio discusses the federal unemployment tax rules applicable to U.S. citizens and aliens working in the United States, and to U.S. citizens and aliens working abroad.

Our authors also shed light on the procedures concerning the payment of U.S. Social Security and unemployment taxes, and the filing of applicable returns.


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AUTHORS

Bloomberg BNA Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The International Aspects of U.S. Social Security and Unemployment Taxes Portfolio was authored by the following attorneys.  

 

THOMAS S. BISSELL, CPA

Thomas S. Bissell is a retired tax partner with Coopers & Lybrand LLP (a predecessor firm of PricewaterhouseCoopers LLP) and author of numerous articles in professional tax publications.

 

Credentials / Thomas received his B.A., Harvard College (1964); LL.B., Columbia Law School (1967); LL.M. in Taxation, New York University (1971); Member, New York Bar (Retired Status); Certified Public Accountant, State of Florida; Member, Tax Management Advisory Board — U.S. International; Member, American Bar Association, American Institute of Certified Public Accountants, Florida Institute of CPAs (FICPA), and FICPA International Taxation Committee; former Attorney-Advisor, Office of International Tax Counsel, U.S. Treasury Department, Washington, D.C.


TABLE OF CONTENTS

Portfolio 6830-1st: International Aspects of U.S. Social Security and Unemployment Taxes

Portfolio Description

Authors

Technical Advisors

Description

Detailed Analysis

I. Scope of Portfolio

II. Overview of the U.S. Social Security Tax on International Workers

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 Tax for Income Tax Purposes

e. Special FICA Rules for Disregarded Entities

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

6. Social Security Numbers

C. Special Rules on Fringe Benefits and Deferred Compensation

1. General

2. Fringe Benefits Exempt from FICA Tax

a. Employee Business Expenses

b. Other Fringe Benefits

3. Fringe Benefits Exempt from SECA Tax

4. Deferred Compensation — FICA

5. Deferred Compensation — SECA

D. Benefits Payable Under the Social Security System

1. Eligibility for Benefits

2. Principal Types of Benefits

3. Nonpayment of Benefits to Certain Individuals Abroad

E. No-Refund Feature of the Social Security Tax

F. Planning to Pay, or to Avoid Paying, U.S. Social Security Tax

III. Social Security Totalization Agreements

A. General

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 Totalization Agreements

1. “Standard” Agreements

a. Employees

(1) General Rule

(2) Detached Worker Exception

(3) Exception to the Exception — Five-Year Rule

b. Self-Employed Individuals

c. Special Arrangements to Vary Agreement

2. Italian Agreement

a. Employees

b. Self-Employed Individuals

c. Special Arrangements

3. Citizenship and Immigrant Status Usually Not Relevant

4. Power to Impose Social Security Tax

5. Identifying Rules that Apply

C. Procedural Issues

1. Individuals Transferring from the United States to a Foreign Country

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

D. Special Problems Common to All Standard U.S. Totalization Agreements

1. Local Hires Who Change Jobs Within the Host Country

2. Transfers from Third Countries

3. Split Payrolls

4. 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

5. Transfers Between Entities with No Common Ownership

6. Employees Working on Vessels and Aircraft

7. Aliens Who Maintain Voluntary Home Country Coverage

8. Canadian Five-Year Test

E. Planning to Minimize Social Security Tax

F. Taxes Not Covered by Totalization Agreements

1. U.S. Taxes Not Covered

2. Foreign Taxes Not Covered

IV. FICA Rules for U.S. Citizens and Resident Aliens Working in the United States

A. Employee's Status as a U.S. Citizen

B. Employee's Status as a Resident Alien Under the Code

1. Overview

2. General Definitional Rules

C. Nonimmigrant Visa Categories that Apply to International Workers

1. Specific Categories

2. Resident Alien Status of Nonimmigrant Aliens

a. A-Visas (Employees of Foreign Governments, etc.)

b. B-Visas (Business Visitors)

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.)

h. H-Visas (Temporary Workers and Trainees)

i. Teachers, Trainees, and Other Nonstudents Holding J- or Q-Visas

j. R-Visas (Religious Workers)

k. Nonvisa Categories

l. Illegal Aliens

m. Resident Aliens Reclassified as Nonresident Aliens Under an Income Tax Treaty

D. FICA Rules Under the Code

1. Territorial Principle

a. General Rules

b. Definition of United States for FICA Purposes

2. Application of the Territorial Rule to U.S. Citizens and Resident Aliens

3. FICA Rules Applicable to Specific Nonimmigrant Visa Categories

4. U.S. Citizen Employees of Foreign Governments and International Organizations

E. Override of FICA Rules Under a Totalization Agreement

F. Override of FICA Rules Under an Income Tax Treaty

V. FICA Rules for Nonresident Aliens Working in the United States

A. Overview

B. Nonresident or Resident Alien Status Under the Code

1. General Definitional Rules

2. Relevance of Nonresident Alien Status for FICA Purposes

C. Special Problems of B-Visa and Visa Waiver Aliens

1. Categories that Do or Do Not Permit an Alien to Work for a U.S. Employer

2. Further Comments on B-1 Visa Holders

3. Rules on the Issuance of Social Security Numbers to Aliens

D. FICA Rules Under the Code

1. The Territorial Basis of FICA for Nonresident Aliens

a. General Rules

b. Services Performed Both Within and Without the United States

c. Definition of United States for FICA Purposes; Activity on the U.S. Continental Shelf

2. Foreign Employer's Concerns in Establishing a U.S. Payroll System

3. Direct Payment of FICA Tax by an Alien Employee

4. Accrual of Quarters of Coverage Even Though No FICA Tax Is Withheld by the Foreign Employer

5. FICA Rules Applicable to Specific Nonimmigrant Visa Categories

a. A-Visas (Employees of Foreign Governments, etc.)

(1) Direct Employees of a Foreign Government

(2) Employees of Foreign Government Instrumentality

(3) Personal Servants of A-Visa Holders

(4) Spouses 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 G-Visa Holders

(4) Spouses and Children of G-Visa Holders

h. H-Visas (Temporary Workers and Trainees)

i. Teachers, Trainees, and Other Nonstudents Holding J- or Q-Visas

j. R-Visas (Religious Workers)

k. Nonvisa Categories

l. Illegal Aliens

E. Override of FICA Rules Under a Totalization Agreement

F. Override of FICA Rules Under an Income Tax Treaty

1. Introduction

2. Explicit Exemption

3. Implicit FICA Exemption as Result of Income Tax Exemption

a. General

b. Arguments For and Against the FICA Exemption

4. FICA Exemption Not Applicable to Employer's Tax

5. Accrual or Denial of Quarters of Coverage

6. IRS Enforcement Where a Treaty Exemption May Be Available

7. Categories of Aliens Entitled to Tax Treaty Exemptions on U.S. Source Salary

a. General Treaty Rules

b. Temporary Business Visitors

c. Teachers

d. Students

e. Researchers

f. Trainees

g. Foreign Government Employees

VI. FICA Tax on U.S. Citizens and Resident Aliens Outside the United States

A. U.S. Citizens Working Abroad

1. Services Performed Abroad for American Employer

a. General Rules

b. Effect of the 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 Tax Paid by the Electing American Employer

f. Applicability of § 482

g. Imputed Income to Employee

h. Special Compliance Problems

i. Planning to Avoid FICA Coverage

j. FICA Planning with Foreign Disregarded Entities

k. Mandatory FICA Coverage for Foreign Entities Under § 3121(z)

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 Tax

g. Making a Capital Investment Subject to SECA Tax

h. Benefit Effects of Losing Social Security Coverage

4. Application of a Totalization Agreement to U.S. Citizen Employees Working Abroad

a. Elimination of Foreign Social Security Tax

b. Elimination of FICA Tax

c. Imposition of FICA Tax Where It Is Not Imposed Under the Code

d. Special Rules Applicable to U.S. Citizens Abroad Under Certain Totalization Agreements

(1) French and Japanese Medical Insurance Rules

(2) Servants Working in Germany

(3) Dutch Moonlighting Rule

(4) Canadian Five-Year Test

B. Resident Aliens Working Abroad

1. FICA Rules Under the Code

2. Application of a Totalization Agreement to Resident Alien Employees Working Abroad

3. Override of FICA Rules Under an Income Tax Treaty

C. Identifying Employees Who Are U.S. Citizens or Resident Aliens

VII. FICA Tax on Nonresident Aliens Working Abroad

A. FICA Rules Under the Code

B. Application of a Totalization Agreement to Nonresident Alien Employees Working Abroad

VIII. International SECA Rules

A. Overview — Comparison with FICA Rules

B. SECA Tax on U.S. Citizens

1. SECA Rules Under the Code

a. Foreign Source Earned Income

b. Add-Back of Excluded Puerto Rican and Possessions Income

c. SECA Tax on Income from Invested Capital

d. Employees of Foreign Governments and International Organizations

2. Override of SECA Rules Under a Totalization Agreement

a. Rules Under the Standard Agreements

b. Detached Worker Rule

c. Italian Agreement

C. SECA Tax on Resident Aliens

1. SECA Rules Under the Code

a. Typical Fact Patterns

b. Immigrant Aliens in the United States

c. Nonimmigrant Aliens in the United States

(1) A-Visas (Employees of Foreign Governments, etc.)

(2) B-Visas (Business Visitors)

(3) C-Visas (Transit Aliens)

(4) D-Visas (Crew Members of Ships and Aircraft)

(5) E-, I-, L-, O-, P-, and TN-Visas (General Working Visas)

(6) Students Holding F-, J-, M-, or Q-Visas

(7) G-Visas (Employees of International Organizations, etc.)

(8) H-Visas (Temporary Workers and Trainees)

(9) Teachers, Trainees, and Other Nonstudents Holding J- or Q-Visas

(10) R-Visas (Religious Workers)

(11) Nonvisa Categories

(12) Illegal Aliens

(13) Board of Directors' Fees

d. Immigrant Aliens Outside the United States

e. Distinction Between Income from Services and from Capital

2. Override of SECA Rules Under a Totalization Agreement

a. Rules Under the Standard Agreements

b. Detached Worker Rule

c. Italian Agreement

3. Override of SECA Rules Under an Income Tax Treaty

a. Arguments For and Against the SECA Treaty Exemption

(1) Treaty-Excluded Income of a § 7701(b) Resident Alien

(2) Treaty-Excluded Income of a Treaty Tie-Breaker Nonresident Alien

b. Categories of Income That May Be Excluded Under a Treaty

(1) Temporary Workers

(2) Teachers

(3) Students

(4) Researchers

(5) Trainees

(6) Foreign Government Workers

c. Accrual or Denial of Quarters of Coverage

D. SECA Tax on Nonresident Aliens

1. SECA Rules Under the Code

2. Imposition of SECA Tax on a Nonresident Alien Under a Totalization Agreement

IX. U.S. Income Tax Relief From Foreign Social Security Tax

A. General

B. Foreign Tax Credit Relief

C. Deduction of Foreign Social Security Taxes

X. Taxation of U.S. and Foreign Social Security Benefits

A. Taxation Under the Code

1. U.S. Social Security Benefits

a. Benefits Paid to U.S. Citizens and Resident Aliens

b. Benefits Paid to Nonresident Aliens

2. Foreign Social Security Benefits

B. Taxation Under the Approach in the U.S. Model Treaty

1. General

2. U.S. Social Security Benefits

3. Foreign Social Security Benefits

4. Treaties That Contain “Virtual” Model Treaty Language

C. Other Treaty Variations — Nonresident Aliens

1. Taxation by Resident Country

2. Reduced U.S. Withholding Tax Under the Swiss Treaty

3. Special Rules in the Indian Treaty

4. Both Countries May Tax

5. The Treaty Is Silent

6. SSA Website and IRS Guidance

7. Taxation of U.S. Benefits in the Alien's Country of Residence

D. Other Treaty Variations — U.S. Citizens and Resident Aliens

XI. Federal Unemployment Tax Act (FUTA)

A. Structure of Tax

1. FUTA Definitions

2. Credit Against FUTA Tax for Qualifying State Taxes

3. Deductibility of FUTA Tax

4. Self-Employed Individuals Excluded from FUTA

5. State Unemployment Taxes

B. Territorial Principle of FUTA

C. Employees Not in a U.S. Payroll System

D. U.S. Citizens

1. Work Within the United States

2. Work Outside the United States

E. Aliens

1. Strict Application of the FUTA Territorial Principle

2. Entitlement to Unemployment Benefits

3. Applicability of FUTA Tax by Nonimmigrant Visa Category

a. A-Visas (Foreign Government Employees, etc.)

b. B-Visas (Business Visitors)

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 (International Organization Employees and Their Servants)

h. H-Visas (Temporary Workers and Trainees)

i. Teachers, Trainees, and Other Nonstudents Holding J- or Q-Visas

j. R-Visas (Religious Workers)

k. Nonvisa Categories

l. Illegal 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 Imposed 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 Tax

e. FICA Requirements Imposed on Employees

3. U.S. Citizens and Resident Aliens

a. General

b. Employees of Foreign Affiliates

c. Common Law Employees Working Abroad

4. Nonresident Aliens

a. Employer and Employee Identification Numbers

b. Filing Requirements Imposed on Employer

c. Requirements Imposed on Employees

d. Aliens Claiming Income Tax Treaty Exemption from FICA Tax

5. 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 Tax

e. Filing Requirements Imposed on Persons Paying Service Fees to Self-Employed Individuals

f. Erroneous Treatment of an Individual as Self-Employed

2. U.S. Citizens and Resident Aliens

3. Nonresident Aliens

4. Exemption Under a Totalization Agreement

C. FUTA

1. General Requirements If Employment Is Subject to Tax

a. Employer Identification Number

b. Taxpaying and Filing Requirements

c. Penalties for Underpayment of Tax

(1) Interest on Underpayment

(2) Penalty for Late Deposit 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

(6) Criminal Penalties

d. Overpayment of FUTA Tax

2. U.S. Citizen and Alien Employees

D. Employer Appointment of Authorized Agent (Form 2678)


WORKING PAPERS

Working Papers

Table of Worksheets

Content

Worksheet 1 20 CFR Sections 422.101–107, Social Security Administration Regulations Relating to the Issuance of Social Security Cards to Aliens

Worksheet 2 20 CFR § 404.1918, How Benefits Are Computed [under a Social Security Totalization Agreement]

Worksheet 3 Computation of U.S. Pro Rata Benefit Amounts Under a Social Security Totalization Agreement

Worksheet 4 Visa Symbols for Classifying Nonimmigrant Aliens

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