Related Practices

• Immigration
• Tax

FICA, the U.S. social security tax on employed individuals, is generally imposed on wages for services performed within the United States, irrespective of the citizenship or residence of the employer or employee and irrespective of the length of time of such services. Thus, a foreign national working in the United States, even temporarily, is generally required to pay U.S. social security taxes, which may be in addition to social security taxes imposed by the employee’s home country. Relief from this problem of “double taxation” is often available under a series of bilateral social security agreements that the United States has concluded with sixteen European countries and Canada. These “totalization agreements” differ from one another in varying degrees; however, they each have two main components. First, they prevent the same wages from being subject to the social security taxes of both the United States and the other signatory country. Second, in certain circumstances, they provide a blended or “totalized” benefit protection to a worker who has split significant time between the United States and another signatory country. This article discusses only the first component.

A common misbelief is that totalization agreements permit the employer and employee to choose the social security system into which they will pay. They do not. Rather, each totalization agreement provides a default rule that social security taxes are to be paid to the country where the services are provided. Thus, a German citizen working temporarily in the United States would, under the default rule of the U.S. German totalization agreement, be required to pay U.S. social security taxes.

Fortunately, all of the totalization agreements (other than Italy’s) contain an important exception to the default rule known as the “sent worker” exception. Under this exception, an employee who is “sent” to the United States by his or her home country employer for a period not expected to exceed five years (and under the German agreement, up to ten years, depending on the facts) and who continues to pay social security taxes to the home country will be entitled to an exemption from U.S. social security taxes. The sent worker exception is important to foreign employers who do not have any means of making the required U.S. payroll deduction under FICA or who do not want to establish a U.S. payroll system for fear of becoming subject to U.S. jurisdiction with respect to corporate taxes. (Foreign employers can generally avoid the latter concern by placing the “sent” employee on the payroll of a U.S. subsidiary for all purposes other than social security taxes.)

The sent worker exception is available only where social security taxes continue to be paid into the home country system. This is typically accomplished by having the home country employer continue to make such payments. Where this is impossible, however, employees are some times able to enter into an agreement to voluntarily pay into the home country system. However, the laws of the home country must permit such voluntary payments (as is the case, for example, in Germany and Canada). In addition, for such a voluntary arrangement to be respected by the IRS and the Social Security Administration (“SSA”), the employee must pay the full amount of such taxes (including the employer portion thereof) that would be required to be paid if such payments were mandatory and not some lesser level of contribution (even if otherwise permitted by the home country).

Foreign nationals who qualify for an exemption from U.S. social security taxation under a totalization agreement must obtain a “certificate of coverage” from their home country certifying that they will continue to make full social security contributions in the home country during the period the employee is in the United States. This certificate of coverage is requested by the employer on behalf of the employee. Once the certificate is issued, the employer can stop withholding U.S. social security taxes with respect to the covered employee’s wages. The certificate of coverage is not filed with the SSA. The employer should retain a copy on file, however, to be shown in the event of an audit.