Page 288 - TaxAdviser_2022

TAX CLINIC

tax is generally based on the employee’s retirement benefit projections in this
country of citizenship.) article were performed using the
Compensation for U.S. Social Security Administration
services provided to
Example 2: R is a U.S. citizen with a ANYPIA software, version 2022.1.)
U.S. employer. If R’s employer sends a US employer by an
him to Germany to work for a period If B took a position outside the Unit-
of no more than five years, under the employee who is a ed States with a foreign employer and
US citizen or resident
United States–Germany totaliza- did not pay FICA in 2022 or 2023, but
tion agreement, he can continue his the facts were otherwise the same, his
FICA coverage and will be exempt is subject to FICA benefit would be $3,372 — the loss of
from German social security tax. no matter where the two high-income years from the 35-year
It is a different story, however, if R services are provided. average having a negligible impact on
initiated a remote-worker arrange- the amount of the benefit.
ment for his own purposes that his As noted above, the United States
employer was simply accommodat- has entered into bilateral social security
ing. In that case, because he was not each $1,510 earned (2022 amount), up totalization agreements with 30 coun-
sent to Germany by his employer, to a maximum of four credits per year. tries. In many cases, these agreements
the employment would be subject to Thus, most workers will earn their 40 allow workers whose employer sends
the general rule of the U.S.–Ger- credits by working during 10 calen- them to work abroad for no longer than
many totalization agreement, exempt dar years. five years to avoid the foreign tax and
from FICA but subject to German But the benefit calculation is more continue home country coverage. Thus,
social security tax at a rate of 20.23% complicated, taking into account an if, in this example, it had been B’s U.S.
for the employee and 19.98% for average of the worker’s top 35 years of employer that sent him to work in a
the employer. inflation-adjusted earnings. (Any year totalization country for two years, there
that a worker is over the Social Security would have been no break in FICA
Even if R bears the incremental cost wage maximum is essentially equivalent coverage and no impact at all on his
of the employee tax, his cost of employ- for purposes of the calculation.) So, in eventual retirement benefit.
ment has increased by more than 12 the example above, if R works for a for-
percentage points to his employer over eign employer abroad for a year or two Example 4: Now assume that B left
the 7.65% U.S. FICA rate. In the current and does not pay FICA, over the course the United States permanently after
environment, then, with “work from of his career he will still likely have 40 2021 and did not contribute to FICA
anywhere” arrangements proliferating, or more years of earnings in the United for the remainder of his career. His
U.S. employers may need to consider States. Once a person exceeds 35 years, 35-year average would include nine
whether “anywhere” should be limited to additional years may just replace earlier, lower-earning years, not just two,
“anywhere in the United States.” lower-earning years in the calculation, but his monthly retirement benefit
which may not have a large impact on upon reaching age 67 would be
Social Security retirement the amount of the benefit. $3,140 — not as drastic a reduction
benefits for mobile workers as many workers might fear.
Less often considered than the rate of Example 3: B was born in 1965 and
home/host country social security tax earned 10% of the Social Security However, if B worked abroad without
is the impact of mobility on a worker’s wage maximum at age 22, 20% at paying FICA for so many years that he
social security benefits. To address that age 23, and so forth. If he also earns had fewer than 35 years in his lifetime
consideration, it is important to have more than the wage maximum in U.S. Social Security average, this could
a basic understanding of how U.S. every year from ages 31 through 65, have a more significant impact on his
Social Security retirement benefits are he will have 44 years of earnings retirement benefit. If he left the United
calculated. In general, to qualify for U.S. in his U.S. Social Security record. States permanently after 2011, having
retirement benefits, a person needs at None of those early, lower-income only 25 years in his earnings record, his
least 40 “quarters” of coverage by FICA. years will be included in his 35-year monthly benefit upon reaching age 67
These credits do not correspond to cal- average, and his monthly benefit would be $2,645. Clearly, when discuss-
endar quarters but rather to the amount on reaching age 67 in 2032 should ing work abroad with an employee
earned: a person earns one credit for be $3,392 (in current dollars). (All who has concerns about the long-range

8 June 2022 The Tax Adviser