US social security tax is withheld from employees’ wages under the Federal Insurance Contributions Act (FICA), which provides funding for the Social Security and Medicare programs. The goal of the Social Security program is to offer retirement, disability, and survivor’s benefits, whereas Medicare provides health insurance.
Although many companies believe they have a good process in place to address the withholding of these taxes for their US-based employees that work in the US, it is critical that they review and understand the rules for their internationally mobile population. Through proper review and planning, companies can mitigate risks and may also achieve substantial cost savings.
A Tax Paid by Both Employers and Employees
FICA is a payroll tax that is imposed on both employers and their employees. In general, every employer is required to withhold and deduct FICA tax from wages. In addition to salary, many other types of compensation are subject to FICA tax, including bonuses, equity income, commissions, allowances, and certain fringe benefits.
For 2019, the Social Security component of FICA (comprised of old age, survivors, and disability insurance taxes) is 12.4 percent and is withheld up to a wage limit of $132,900. The Medicare component (hospital insurance taxes) is 2.9 percent on an unlimited wage base. Each of these taxes is withheld evenly between the employer and employee (i.e., 6.2 percent Social Security and 1.45 percent Medicare tax for both employer and employee). In addition, a 0.9 percent Medicare tax is imposed on single taxpayers receiving wages in excess of $200,000. This wage requirement differs for married taxpayers filing a joint return ($250,000) and married taxpayers who file separately ($125,000).
Under FICA, an employer is responsible for withholding these social security taxes from employee wages and depositing the amounts owed by both employee and employer with the IRS. It is critical for employers with mobile employees to understand the rules. For example, employers who employ US citizens and permanent residents (i.e., green card holders) may need to withhold FICA even if their employee is working outside the US. If these same employees are employed by a foreign employer, then FICA would only apply to wages relating to US services.
Non-Residents Working in the US
Employers should be diligent when employing non-residents in the United States with regard to the applicability of social security tax. Under US domestic tax rules, social security tax would only apply to US-sourced income (i.e., allocation based on the proportion of US workdays for most cash compensation). Depending on their immigration status, social security tax may not be required for a certain period of time. For example, there are exceptions to FICA for certain students and trainees on F and J visas who are working under the terms of their visas for limited periods of time.
Additionally, if an employee remains covered in the social security system of their Home country, social security tax may not be required in the Host country if a totalization agreement is in place between both countries. This scenario is most common when the Home country sends the employee on a foreign assignment to the Host country.
There are a number of complexities that can apply to the calculation of social security taxes, and companies need to make sure they understand the rules and obtain proper documentation from the employee to support the appropriate payroll withholding. Failure to do so can result in additional compliance costs, including penalties and interest.
Totalization Agreements Can Limit Double Taxation
The United States has income tax treaties with a number of other countries that address corporate and individual tax issues, but these treaties do not apply to social security taxes. However, in some cases, both employees and employers may take advantage of totalization agreements the United States has entered into with 30 other countries. Goals of these totalization agreements include the elimination of dual coverage and taxes and the filling of gaps in benefit protection for mobile workers.
In general, these agreements provide that an employee would pay social security tax in the country where they are working. However, the agreements typically also provide an ability for the employee to remain covered in their Home country for temporary employment scenarios (commonly up to five years, with limited extensions often possible) if a “certificate of coverage” is obtained from the Home country’s Social Security Administration.
If an employee is transferred for an indefinite period or if a totalization agreement is not available, a certificate of coverage would not be possible, which could result in unexpected employer and employee social tax costs. For these reasons, planning is important. In some cases, social security tax planning alone can lead to cost savings running 10-15 percent of the total cost of the assignment.
Mobility Tax Specialists Can Help with Totalization Agreements
Mobility tax specialists who understand the rules and requirements of social security tax can help employers navigate the US and international social security system in an efficient manner with the proper up-front planning. Additionally, mobility tax specialists can assist with the filing of certificates of coverage and identification of tax planning ideas such as review of assignment duration or localization options.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.