Social Security Tax Obligation for American Expatriates
In the complex world of international taxation, understanding the intricacies of the United States tax system can be a daunting task for expatriates. One such challenge is the self-employment tax, which includes Social Security and Medicare contributions. However, with the right legal and strategic approach, it's possible to reduce or eliminate these liabilities while staying compliant.
The United States continues to tax its citizens regardless of where they live. This means that self-employed expatriates, whether they live in a tax-friendly country or not, are treated as both an employer and employee by the Internal Revenue Service (IRS) and pay 15.3% of their net income as Social Security and Medicare.
However, forming a foreign corporation in a tax-friendly country and paying oneself a salary through that entity could legally shield an expat from this self-employment tax. This strategy, used by numerous seven- and eight-figure entrepreneurs and investors, allows them to take back control of their taxes and create bespoke global strategies, as provided by organisations such as Nomad Capitalist.
Totalization Agreements, US treaties with over 30 countries, prevent expats from paying social security tax in two places. If an expat resides in a country with a Totalization Agreement with the US, they may only need to pay into that country's social security system, potentially avoiding US Social Security tax. The countries where US expatriates can be exempted from paying social security contributions through totalization agreements include Canada, Germany, Japan, the United Kingdom, Australia, France, Italy, South Korea, and Mexico, among others.
It's essential to note that the IRS does not exclude self-employment tax from the Foreign Earned Income Exclusion or Foreign Tax Credit. This means that even if an expat's income comes from a non-US employer, they are usually exempt from US Social Security tax. However, if an expat's income comes from their own business, they may still be liable for self-employment tax.
Many expats choose to walk away from the Social Security system entirely, investing in private retirement vehicles or international pension plans with better returns and fewer limitations. Social Security benefits can be locked in once an expat has earned 40 credits (from about 10 years of work), even if they move abroad and never pay in again. However, up to 85% of combined Social Security benefits can be considered taxable income in the US, depending on the expat's other sources of income and filing status.
In 2025, the Social Security tax is 6.2% for employees and another 6.2% for employers on up to US$176,100 in earnings. If self-employed, the rate is 12.4%. This means that an expat earning six figures from their own business could be handing nearly 16.2% of their income to a system they may never benefit from.
If an expat is tired of being overtaxed, overregulated, and underappreciated, it might be time to start creating their own tax strategy. With the right guidance, it's possible to navigate the complexities of international taxation and ensure that your hard-earned income is kept securely in your pocket.
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