Many foreign nationals temporarily working and living in the United States have little or no understanding of the U.S. Social Security program’s benefits and related taxes. It is the intent of this article to provide a general overview of some of U.S. Social Security’s most important benefits and tax issues related to foreign nationals working in the United States.

U.S. Social Security Generally

The United States has a Social Security program that provides Old Age (retirement), Survivors and Disability Insurance (OASDI) to eligible participants. In addition, the Medicare program provides medical care and hospital insurance (HI).

Both Social Security and Medicare are funded through employer and employee payroll taxes.[1] Social Security’s OASDI program limits the amount of wages subject to taxation in a given year. For employment earnings in 2015, the wage limit is $118,500 and the tax rate is set at 6.2 percent for both employers and employees. For Medicare’s Hospital Insurance (HI) program, there is no taxable maximum; both the employer and employee are subject to tax rates under the HI program at 1.45 percent of taxable wages.

Eligibility for OASDI Benefits

Once an individual accumulates at least 10 years of coverage (40 quarters) under the OASDI program, the person is considered “fully insured.” This status entitles the individual and his/her dependents to a wide range of Social Security benefits (see below).  Another lesser status that can be earned is called “currently insured” status.

Every person’s Social Security benefits are based on his/her “earnings record” which is maintained by the Social Security Administration (SSA). The SSA keeps track of the Social Security taxes that have been paid each year with respect to the wages of each individual and also the number of quarters of coverage earned by that person.

Principal Benefits

Whether an individual is fully or currently insured usually determines whether and to what extent Social Security benefits are payable to an individual and/or his/her dependents. The following types of Social Security benefits are usually payable to eligible individuals:

  • Retirement benefits, payable at retirement age (age 65 to 67, depending on date of birth), but only if the person is “fully insured;”
  • Survivors’ benefits, payable to certain survivors of a deceased worker who was fully insured;
  • Disability benefits, payable to a disabled worker who is fully insured andwho has completed at least 20 quarters of coverage during the previous 40 quarters; and
  • Medicare benefits, available to individuals age 65 and older who have completed 40 quarters of coverage, and to many other individuals (including certain disabled individuals below age 65).

No Social Security Tax Refunds

Unfortunately there are no U.S. Social Security tax refunds available for individuals who may have paid into Social Security but have not accumulated enough quarters of coverage for Social Security benefits.

This rule applies to everyone and so applies to foreign nationals working in the United States for limited periods of time and to U.S. citizens. Thus, if a U.S. citizen pays Social Security taxes and then dies without being either currently or fully insured, his/her dependents are not entitled to survivors’ benefits nor are they entitled to a refund of the taxes paid.

However, the provision of Social Security benefits and the payment of U.S. Social Security taxes may be substantially mitigated for U.S. citizens working abroad in countries having concluded a social security agreement (“Totalization Agreement”) with the United States and foreign nationals from Totalization Agreement countries who work in the U.S.

International Social Security Agreements

Where a U.S. citizen is sent to work abroad or a foreign national is sent to work in the United States, he/she may be subject to social security tax under both U.S. and foreign laws. In response to potential double social security taxation, the United States has concluded social security “Totalization Agreements” with more than 20 countries.

A totalization agreement has two primary aspects:

(1) Relief from double social security tax with respect to the same employment; and

(2) The totalization of social security benefits, so that an individual who has paid social security tax to both countries, but has not accumulated enough coverage to qualify for benefits in one or both of the countries, may still qualify for social security benefits in at least one of the countries.

For a foreign national from a country with high social security taxes who works in the United States, a totalization agreement can not only permit the worker to avoid double social security tax, but also allow him/her to pay reduced social security taxes while working in the United States.

Relief from Double Social Security Tax

The general rule in all totalization agreements is that an individual’s wages may not be subject to social security taxes imposed by the United States and by the other country at the same time. Instead only one of the countries may impose its social security tax.  This rule is to eliminate double social security taxation where the individual would otherwise be subject to tax in both countries in the absence of the agreement. If a particular foreign national working in the United States is not subject to home country social security tax, generally the taxation provisions of a totalization agreement would not apply and he/she would just be subject to U.S. Social Security tax.

Totalization of Benefits

Where an individual has accumulated periods of coverage under the social security systems of both the United States and another country, and where the period of his /her coverage in either the United States or in the foreign country is not long enough to entitle him/her to social security benefits, he/she may elect a pro rata “totalized benefit” from the country in which he/she has not worked long enough to qualify for benefits. Also, if the worker fails to qualify for benefits under the laws of both countries, he/she may elect a totalized benefit from both countries. Typically, in order to qualify for U.S. Social Security benefits, a foreign national from a totalization agreement country must obtain only 6 quarters of coverage under the U.S. Social Security system.

Planning to Pay, or to Avoid Paying, U.S. Social Security Tax

Unlike most other federal taxes, the U.S. Social Security system is unique in that it provides a direct relationship between payment of a tax and eligibility for benefits. Because a worker who pays the U.S. Social Security tax can expect to one day receives a Social Security benefit, the worker may not want to avoid paying Social Security tax. A foreign national, for example, may want to pay Social Security tax if he/she is only temporarily working in the United States if he/she is from a totalization agreement country or if the foreign national plans to work in the United States for an extended period of time.  Therefore, a foreign national working in the United States should carefully consider the pros and cons of U.S. Social Security tax planning, including whether the ultimate receipt of Social Security benefits will be worth the tax costs involved.

[1] The Social Security and Medicare programs are also funded by the Self-Employment Contributions Act (“SECA”). SECA will not be covered in this article.

This articles in this newsletter is not intended as legal or tax advice, and cannot be relied upon for any purpose without the services of a qualified tax professional.