A Totalization Agreement Overview, International Social Security

Totalization Agreements (International Social Security)

The United States Government has entered into many different types of international agreements and treaties with foreign countries across the globe. Some of the more common types of agreements taxpayers may be aware of are:

• • • International Tax Treaties

    • FATCA Agreement

    • Deferred Prosecution Agreements

    • Estate Tax Treaties

Another type of agreement that the United States has outlined to with some foreign countries is a totalization agreement (international Social Security Agreements). The concept behind the totalization agreement is to eliminate the requirement of some taxpayers who may work overseas or for foreign employer to have to pay into two different Social Security systems.

Overview of Totalization Agreements (International Social Security)

For example, let’s say a U.S. Citizen taxpayer lives in Australia and is self-employed. If the Taxpayers pays  into the Australian Social Security system, and then it would not be fair for the taxpayer to also be required to pay into the U.S. Social Security system because when it is time to receive Social Security benefits there can be a limitation as to how much benefits the taxpayer can receive under the windfall provision. Unfortunately, the United States has only entered into ~25 Totalization Agreements, so it does not apply to all countries. Let’s go through the basics of a totalization agreement to understand how it may impact taxpayers who work abroad and slash or work for a foreign employer.

U.S./Australia Totalization Agreement

For purposes of explanation and to illustrate how the totalization works, let’s focus on one totalization agreement in particular – the US/Australia totalization agreement. It is important to know, that this agreement is different than other agreements the United States has entered into with Australia, such as the US-Australia Tax Treaty, FATCA Agreement and Estate Tax Treaty.

What Taxes Does It Cover?

The totalization agreement covers Social Security taxes in the United States along with Australian Social Security benefits in Australia.

• • • “For Australia, the Agreement covers Superannuation Guarantee (SG) contributions that employers must make to retirement plans for their employees. Australian social security benefits covered by the Agreement include the social security age pension, disability support pension for the severely disabled, pensions payable to surviving spouse and carer payments.”

For U.S. Citizens Residing in Australia

For some U.S. taxpayers who live and work in Australia, they can avoid having to pay into the US Social Security system that they are paying into the Australia Social Security system.

• • • “Self-employed U.S. citizens residing in Australia do not have to pay U.S. Social Security contributions on self-employment income. Australia’s SG program does not compulsorily cover self-employment.”

Especially Helpful for Self-Employed Workers

The totalization agreement benefits self-employed workers especially. That is because self-employed taxpayers will typically have to pay into both country Social Security systems for both the employer and employee. Thus, for a U.S. citizen for example who works in Australia and is self-employed they will be exempt from U.S. Social Security coverage and do not have to pay into the U.S. Social Security program.

• • • “Self-employed workers are covered by U.S. Social Security if they are U.S. citizens or resident non-U.S. citizens. The agreement does not have any effect on the coverage of self-employed United States residents; they remain covered by U.S. Social Security.  The agreement exempts self-employed U.S. citizens who reside in Australia from U.S. Social Security coverage.

    • “Self-employed United States residents, including Australian citizens, do not need any documentation to show that they are exempt from SG contributions. Self-employed U.S. citizens residing in Australia do not have to pay U.S. Social Security contributions on self-employment income.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.