"Bill Brock" <wbrock[at]21stcentury.net> wrote:

- quote -

For U.S. taxpayers working for a non-U.S. employer, the rule
for FICA taxes is based on where the taxpayer entered into
the employment agreement. If the agreement was made in the
U.S., taxpayer is subject to FICA taxes; if the agreement
was made outside the U.S., taxpayer is NOT subject to those
taxes. When I moved to Thailand a few years ago, I did this
research for myself and to have the knowledge when advising
clients. I no longer have the documents handy and cannot
give you a cite. However, I do know that this is why I do
not pay FICA taxes and many of my clients do not, either. We
have never had any repercussions from IRS on this.

In my case, I left a position with another company (where no
one paid U.S. FICA taxes) and established my own Thai
company. I draw a salary from this company (so the
exclusion rules are easier to apply) and do not pay FICA
taxes. Thailand does not have an equalization agreement but
I don't believe this changes the basic rule.

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wbrock[at]21stcentury.net (Bill Brock) wrote:

- quote -

Based on the silence, I'm guessing that my question, as
origianlly posed, was too obscure & abstract. But I've had
to deal with this issue SEVERAL times in the last year.
Because of the economy, several of my clients have accepted
"unconventional" work abroad--mostly normal middle-class
folks making between $50 and $100K. For the present
purpose, it's safe to assume that these clients are
intending to eventually return to the USA, and will always
opt out of paying taxes to the foreign equivalent of social
security. They have no assurance that they'll be able to
vest in the foreign social security system, and they'd
rather contribute to the US system.

Sometimes, it's clearly foreign self-employment. No
question that USA SE tax is then due, even on foreign earned
income exclusion dollars.

But other times (and here's the crux of my question), the
facts suggest an employer-employee relationship.

--An aggressive reading of the Code suggests that the
foreign employee might be able to "get away" with paying
zero US FICA tax because s/he's NOT SELF-EMPLOYED. IMO that
violates the spirit of the totalization agreement, but I
also don't see where the US tax should be paid. (Granted, a
foreign nation party to the treaty may be getting jobbed
here, but what if work is performed in a country not party
to the treaty?)

--In a conservative interpretation, the employee would pay
at the 15.3% self-employment rate (the theory being that
foreign employer knew employee would opt out of local social
security equivalent & gave cash to compensate). This is the
interpretation I'm currently going with, but I don't think
it's fair to the employees.

--I see no support anywhere for a commonsense reading that
bona fide employees only contribute at the 7.65% employee
rate.

Obviously it's sometimes very easy for a dishonest TP to
cheat on foreign earned income, but I'm fortunate that my
clients (by & large) want to comply with the law.

In the absence of authoratitive guidance, gut instincts are
welcome.

Bill Brock, CPA

- quote -

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My understanding is that the self-employed have to pay SE
tax on Schedule C income, even if taxpayer otherwise
qualifies for the foreign earned income exclusion, unless
there's a totalization agreement with the foreign nation &
TP opts to contribute to the foreign nation's social benefit
plan instead (Rev. Rul. 92-9). The idea is that the
self-employed should have to contribute *somewhere* at least
once, but only once....

My question: what happens when there's a bona fide
employer-employee relationship, and place of employment is a
nation party to the totalization agreement (e.g., Austria,
Canada, South Korea), but no "FICA equivalent" is withheld?

Same situtation, except that place of employment is a a
nation NOT party to the totalization agreement (e.g.,
Bosnia)?

I've read the Code, Rev.Proc. 80-56, & Rev.Proc.84-54: it's
still unclear to me.

***

Code Sec. 1401(c)

During any period in which there is in effect an agreement
entered into pursuant to section 233 of the Social Security
Act with any foreign country, the self-employment income of
an individual shall be exempt from the taxes imposed by this
section to the extent that such self-employment income is
subject under such agreement to taxes or contributions for
similar purposes under the social security system of such
foreign country.

***

Bill Brock

email myname[at]myname.net (substitute billbrock for myname)

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