Every employee notices the line on his or her paycheck that refers to FICA tax being withheld; even certain taxpayers working abroad have these taxes withheld. The Federal Insurance Contributions Act (FICA) is a tax on an employee’s wages comprised of both the Social Security tax and the Medicare tax. U.S. citizens and resident aliens who work abroad for an American employer or a foreign affiliate of an American employer must pay FICA taxes. Totalization Agreements, of course, can impact this analysis as well.
Not all workers are subject to FICA taxes though. Only payments for services constituting “wages” for services provided during “employment” as those terms are defined in IRC 3121(a) and (b) are subject to FICA taxes. Employers will issue a Form W-2 to these employees. Self-employed U.S. citizens and resident aliens abroad may be responsible for U.S. self-employment tax, which includes Medicare and Social Security taxes.
A U.S. citizen or resident alien working abroad owes FICA taxes if they work for any of the following: an American employer; in certain instances, the foreign affiliate of an American employer; or a foreign person treated as an American employer under IRC 3121(z).
The list of American employers include
- The U.S. government;
- An individual who is a U.S. resident;
- A partnership if at least two-thirds of the partners are U.S. residents;
- A trust if all the trustees are U.S. residents;
- A corporation that is organized under the laws of the U.S., U.S. states, or U.S. territories; and
- A foreign employer that has an employee performing services in connection with a contract between the U.S. government and a member of a domestically controlled group of entities, which includes the foreign employer.
A foreign affiliate of an American employer is a foreign entity in which an American employer has at least a 10% interest.
An employee is an individual who either has the status of an “employee” under the usual common law rules applicable in determining the employer-employee relationship or serves as a superintendent, manager, or officer of a corporation. A person acting as a director or an officer who doesn’t perform any services or receive any compensation is not an “employee” for FICA purposes.
Note that Totalization Agreements (Social Security Totalization Agreements) are entered into between the U.S. and some foreign countries to prevent the payment of Social Security taxes to two jurisdictions on the same wage or self-employment income. If the U.S. has entered into a Totalization Agreement with the foreign country in which the wages were earned, the terms of that agreement will govern whether Social Security taxes must be paid in the United States. For a list of Totalization Agreements with foreign countries, see the link below.
U.S. employment taxes, including FICA, do not apply to payment for services performed abroad as an employee of a foreign government, including payments for services performed by ambassadors, other diplomatic and consular officers and employees, and non-diplomatic representatives. However, payments for services performed for a U.S. or Puerto Rican corporation that is owned by a foreign government are subject to U.S. employment taxes.
If a taxpayer is working abroad and the employer is not withholding FICA taxes, then the taxpayer needs to be aware of the potential FICA tax liability. The issues the employee needs to address are: (1) whether the taxpayer is an “employee” for FICA purposes; (2) whether the employer is considered an American employer or foreign affiliate of an American employer; and (3) whether a Totalization Agreement is in place between the U.S. and the foreign country where the taxpayer is working.