For expat employees of US-based businesses and the government itself, that agreement and others like it didn’t have tremendous impact if one was playing by the rules to begin with and not attempting to hide income illegally. The legal income was reported through the employer’s records and statements.
For the self-employed expat, however, the Switzerland agreement and others, such as the Panama agreement, the dissolution of banking privacy guarantees have created quite a quandary for those who use international banking for possibly illegal activity. However, if you live abroad and are self-employed, don’t automatically assume you have to head for the hills.
However, you should know that if you have a foreign account not declared to the IRS, and they discover it, you can and will be fined up to 50 percent of the account’s balance–for each year the account has not been declared.
All expats know or should already know of IRS Form 2555 regarding income exclusion and its income limitation. However, your social security taxes could be effected as well as your income taxes by your expat status.
In the US, most if not all the states require payment of income tax if you reside in the state and if you work in the state. Those who work in one state but live in another often pay overlapping state taxes on the single income source. For expatriates, whether self-employed or not, a similar situation could happen regarding social security taxes.
If you live in a foreign country that has a domestic social security plan (SSP), you might gain an exemption from US social security taxes if 1. that country is included on the exemption list with the US government and 2. you pay those social security taxes. You should note, though, that your eventual US social security retirement income will not reflect the amounts you paid to a foreign government. Likewise, if your income is exempt from the foreign plan, and you don’t pay into the local system, you will not receive their retirement benefits from that country.
Called Totalization Agreements, these mutual-exemptions avoid that dual payment scenario, but if you are employed by a business and work in a foreign country which grants exemption from local SSP payment, you should have your employer obtain a certificate of compliance from the International Programs of the Social Security Administration. Without that certificate, your employer must withhold from your paycheck the dual-country taxes, not just the US taxes.
If you work in a country that has a Totalization Agreement, and you are required to pay into the foreign country’s plan, you can still avoid duplicate SSP taxation by obtaining a statement from the foreign government verifying your pay is subjected to taxation in the local plan.
If for some reason, you can’t get this statement, contact the same US government office and obtain a declaration from the US government confirming your wages are not covered by the US Social Security system. It’s highly recommended that you secure the original document you receive, if self-employed, in a US bank’s safety deposit box and keep only a copy with you where you live and work.
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