Isolated licensees, independent contractors, partnership partners and LC members with multiple members are all required to pay an Independent Activity Tax (SE) with two components: the Medicare tax and the Social Security tax. Since employers generally determine how salaries should be withheld, independent taxpayers are responsible for determining their own debt for the SE. In this article, we will discuss how U.S. citizens and residents abroad are affected by the self-employment tax. If you live abroad, you may have heard of agreements between the United States and your country, which are known as totalization agreements. You may also have heard that they are referred to as social security agreements. For American expats who live and work abroad, it is very important to know if the U.S. has a totalization agreement with your host country and the details of such an agreement. Each contract determines which taxes will be covered. All agreements include federal revenue collected by the Internal Revenue Service on Form 1040 and income tax, which varies from country to country. Tax treaties do not include Social Security, known in the United States as the Social Security Tax. Social security contributions have different names all over the world. Totalisation agreements only apply to social security contributions.
A totalization agreement defines the country to which the tax is paid and how to manage the credits earned to ensure that a person is entitled to benefits under a system somewhere. Workers who are exempt from U.S. or foreign social security contributions under an agreement must document their exemption by obtaining a country coverage certificate that continues to cover it. For example, an American worker temporarily posted to the UK would need a SSA-issued coverage certificate to prove his exemption from UK social security contributions. Conversely, a U.K.-based employee working temporarily in the United States would need a certificate issued by the British authorities to prove the U.S. exemption.