Page 287 - TaxAdviser_2022

Example 1: L, a U.S. citizen who
is employed by a U.S. employer,
requests a remote-work arrange-
ment for a year to care for her ailing
parents in a foreign country. While
living abroad, she will continue to
be subject to FICA but may also be
subject to the host country’s social
security tax. Many foreign countries’
social security tax rates are much
higher than those of the United
States, so being subject to double
social security tax may be a huge
incremental cost. Even if L is held
responsible for the employee-level
foreign social security tax, the addi-
tional employer-level tax would also
significantly increase the cost to her
employer of her work abroad.
and ceases to apply when taxable wages
Employee Benefits reach an annual limit of $147,000 (the A similar problem can be imagined
& Pensions inflation-adjusted 2022 amount). The in the reverse scenario, when a foreign
employer pays the same amount as a worker might find herself subject to
Social Security concerns payroll tax. The other component is FICA while temporarily working in the
for remote workers and Medicare tax, which has no upper limit. United States, while still subject to her
international assignees The withholding rate of 1.45% increases home country’s social security tax be-
Many Americans have little sense of to 2.35% when wages exceed $200,000. cause that is her permanent base.
how their Social Security retirement (The increased withholding rate thresh-
benefits are calculated. At the end of a old of $200,000 applies to all employees, Social security ‘totalization’
long career, they apply for their pension but a married couple filing jointly could agreements
and accept what is paid. Likewise, when be over- or underwithheld because their The United States shares special social
it comes to tax planning, U.S. Federal combined compensation over $250,000 security agreements (often referred to
Insurance Contributions Act, or FICA, is subject to the 2.35% rate. The differ- as “totalization agreements”) with 30
tax, which includes Social Security tax, ence is reconciled on their tax return.) countries, which are intended to pre-
does not get much attention. A flat tax The employer pays a corresponding vent the payment of double social secu-
with no deductions, imposed on higher payroll tax of 1.45% on all compensation rity tax. However, issues can still arise.
levels of earnings at a relatively low rate, paid to the employee. Most agreements the United States
FICA is generally an afterthought when has entered into set forth a general
tax planning is concerned. FICA tax for international rule that a worker should pay only the
However, when a worker moves across workers social security tax of the country where
international borders, the cost can be sig- In general, all compensation earned service is being provided. They also in-
nificant, and there could be a substantial for employee services provided in the clude a special “detached worker” rule:
impact on the worker’s future retirement United States is subject to FICA. (A If a worker is sent by his or her current
benefits. For these reasons, it is impor- few statutory exceptions are not covered employer on an assignment of no more
PHOTO BY REDGOLDWING/ISTOCK Social Security coverage and benefits. vices provided to a U.S. employer by an covered by his or her home country’s
tant to understand the basics of U.S.
than five years, he or she can remain
here.) In addition, compensation for ser-
The Social Security component of
employee who is a U.S. citizen or resi-
social security system and avoid pay-
FICA, formally known as Old-Age,
ing host country tax. (The agreement
dent is subject to FICA no matter where
the services are provided. This simple
Survivors, and Disability Insurance
with Italy is the exception; in that
agreement the determination of which
(OASDI), is withheld at the rate of 6.2% rule, found in Sec. 3121(b), may have a
of wages with respect to employment
major impact on mobility cost.
country can impose its social security
www.thetaxadviser.com June 2022 7