Cross-border workers sometimes pay into one or more Social Security systems with no future benefit

Some – but not all -- nations are signing special agreements to solve this problem

By: Mohitindervir Sandhu  /  January 11, 2016

When we think of pop musician Justin Bieber, the first words that come to mind might be Canada, music, and haircuts. It’s unlikely that we think about his retirement benefits, though it is certainly something his tax and financial planners have considered.

Bieber is like many other individuals in our globally connected era who work in multiple countries as an employee or as an independent contractor. For these individuals, the U.S. foreign tax credit prevents double taxation of income. But there’s rarely a simple solution for the other big cross-border income issue:  Social Security contributions.   

Fortunately for Bieber (and other Canadians), the U.S. and Canada have an agreement that allows Canadian citizens to pay toward Social Security in the U.S. or Canada, but not both. However, not all nations have these agreements.

Although international trade is a hot topic in our globalizing world, the conversation doesn’t always include cross-border workers and the personal tax effects they can experience when nations aren’t on the same page.

Multinational workers can experience effects at home and abroad

First, it’s important to understand how the U.S. Social Security system works. Over a worker’s lifetime, individuals build credits toward their Social Security benefit, based on their earnings and the number of years they work.

The Social Security system overlaps with the U.S. tax system when Social Security taxes are withheld from employees’ paychecks and reported on the Form W-2 (FICA taxes) or paid through Schedule SE (self-employment tax).

Cross-border employment creates a wrinkle in this system. Here are several examples.

Foreign workers in the U.S. may pay in, but get no benefit

If foreign employees on certain visas work in the U.S. for at least 183 days, the government considers them resident aliens under the tax code.

That means they have to start paying FICA taxes to the U.S. But if they end up moving back to their home nation or to another nation without building enough U.S. credits, they won’t receive any U.S. Social Security benefits when they retire.

It’s also possible that the time they worked in the U.S. won’t count toward their home nation’s Social Security system.

U.S. citizens working abroad may not get credit

U.S. citizens working abroad for a non-U.S. company won’t be building credits toward their future U.S. Social Security benefits. And they may not be building credits under the foreign nation’s Social Security system, either. Although there are certain situations when U.S. citizens working abroad will still be contributing to their U.S. Social Security, none of those situations cover working for a foreign company.

Workers may make double contributions, with no guaranteed benefit

For many cross-border workers, it’s possible that a worker can end up contributing to both the U.S. and foreign nation’s systems. And the contributions may not necessarily lead to payments from both systems, because the contributions may not meet the minimum requirements for Social Security credits in either nation. At the very least, there’s real potential for double contributions of the worker’s earnings.

Although the foreign tax credit can help with foreign Social Security taxes paid to countries without a totalization agreement, it applies only to U.S. citizens with foreign-sourced income (income is sourced to the location where the work is done). Since a foreign person working in the U.S. will have U.S.-sourced income, the foreign tax credit won’t be of any help to that worker.

Totalization agreements are a partial solution

To address these complications, many nations have developed totalization agreements. These agreements focus on Social Security contributions and distributions. They aren’t the same as income tax treaties, which focus only on income taxes and sometimes estate and gift taxes.

So far, the U.S. has signed 25 totalization agreements, mostly with developed European nations. Essentially, the agreements:

  • Cover most cross-border situations and outline which nation the worker should pay Social Security taxes to.
  • Require workers to obtain a certificate of coverage from one nation’s Social Security department to provide to the other nation’s department.
  • In some cases, allow a worker who doesn’t have enough credits in one nation to combine them with the credits of the other nation to obtain Social Security coverage.

Totalization agreements don’t address all taxes. An example is Medicare. If a U.S. taxpayer builds credits toward a Medicare-equivalent plan in foreign nation, the credits don’t transfer to the U.S.

While totalization agreements don’t cover every aspect of international taxation, they are designed to tackle the large problems of dual Social Security contributions and insufficient credits for cross-border workers. For countries that don’t have totalization agreements with the U.S., it’s fully possible that these problems will occur.

Many countries are tackling cross-border challenges

As workers move around the globe more easily, more nations are moving toward totalization agreements.

The United Kingdom a developed economy with large amounts of cross-border employment, has a multitude of agreements with other countries including EU/EEA countries. Canada also has numerous agreements with other countries. Importantly, a totalization agreement between Canada and India recently came into force.

Creating these agreements is not easy. Officials from both nations must align their Social Security regimes and internal laws to match the agreement. That can get complicated when nations’ Social Security systems vary from fully public to mostly privatized.

Countries are increasingly working through these challenges to examine globalization through the framework of cross-border employment. With international totalization agreements, cross-border workers – from pop stars to software developers – will be in a better position to receive Social Security benefits from one or more countries when they retire.

Editor’s note: This article has been reviewed for changes following the passage of the 2017 Tax Cuts and Jobs Act. The information provided in this article was not affected by the 2017 TCJA.

Author Name

Mohitindervir Sandhu

Mohitindervir Sandhu, JD, EA, is a former senior tax research analyst at The Tax Institute. Mohitindervir led a research team focused on international tax issues.

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