Paying Social Security taxes is generally simple, but it can get complicated if a client works in another country for an extended period of time.

The key is for advisers working with expatriate clients to understand all the right questions to ask, because rules differ by country and employee classification.

First, the good news: Because of the foreign earned income exclusion, Americans working abroad don’t pay any federal income taxes on their first $101,300.

But the foreign earned income exclusion applies only to federal income tax, not Medicare, self-employment taxes or Social Security.

“By and large, we’re not dealing with people who are employed by companies because their employers are covering most of their obligations for them,” says Trisha Buchmann, an Internal Revenue Service enrolled agent with Greenback Expat Tax Services in Wheaton, Illinois.

Most of the Social Security issues with which her firm deals are those of self-employed clients, who have to pay higher self-employment taxes in the U.S. and also may have to pay Social Security taxes twice -- in the U.S. and in the country in which they work, she says.

To ease that problem, the U.S. has signed “totalization agreements” with 25 countries to allow workers to pay into just one country’s social system.

In addition to preventing double taxation, totalization agreements also help workers establish eligibility for benefits by recognizing work history in more than one country.

Advisers need to work with tax experts to know what totalization agreements stipulate and which countries have them.

Most European countries have signed totalization agreements with the U.S., while most Asian and Latin American countries haven’t. Not a single country in the Middle East has signed one.

“Mexico doesn’t have one,” Buchmann says.

“They have one pending, and we keep on fighting about it, and no one has actually agreed to it,” she says. “So, believe it or not, we have one with Canada, but we do not have one with Mexico.”

It is important for advisers to explain that not every country’s payroll contributions will be the same, and they should impress on clients the distinctions between health and Social Security benefits, Buchmann says.

Medicare benefits are based more on location, and that can be a problem for expats retiring in the U.S. after working abroad.

“The totalization agreements will make sure that they have enough pension-wise between the two systems, but they may suffer from not having Medicare coverage if they come back to the States,” Buchmann says.

Many expats also marry foreign spouses, and advisers should be aware that cross-border Social Security survivorship benefit issues can also be complicated, says Katie Lenz, a CFP who is an adviser in Bend, Oregon, for Birmingham, Alabama-based Timberchase Financial.

“Basically, there are treaties with some countries that allow non-U.S. citizen/resident spouses to receive benefits if they are residents or citizens of the treaty countries,” she says. “There is also a rule where if the spouse lived in the U.S. for five years at any time -- it doesn't need to be continuous -- they are also eligible.”

This story is part of a 30-30 series on Social Security.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access