Employers' FICA obligations for foreign nationals who work in the U.S.

• Author: O'Brien, Michael

Employers, both U.S. and foreign, frequently wonder at what point an obligation exists to withhold U.S. social security taxes on compensation paid to foreign nationals for services rendered in the U.S. While the answer depends on individual facts and circumstances, certain guidelines have been established.

The FICA system applies to any service performed by an employee for an employer within the U.S., regardless of the citizenship or residence of either. This is consistent with the territorial nature of social security taxes--the employee paying social security tax in the country in which the services are rendered. Totalization agreements provide relief for some individuals, while individuals from nontotalization countries have practically no options for escaping FICA. (See Tax Clinic, "Payroll Taxes, Expatriates, and Nonresident Aliens" TTA, May 1993, p. 306.)

Totalization Agreements

Despite the territorial rule described above, an employee who qualifies as a "detached worker" under a totalization agreement usually can remain in a home country's social security system for a defined period, if certain criteria are satisfied. The U.S. presently has totalization agreements in force with Austria, Belgium, Canada, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the U.K. In addition, totalization agreements are either pending or under negotiation with Argentina, Australia, Chile, Denmark, Japan and Korea. Discussions concerning proposed agreements are under way with Brazil, Israel and New Zealand.

Totalization agreements apply to earnings that, under the domestic laws of both a home country and the U.S., are subject to social security taxes. If a foreign employee's wages earned while temporarily working in the U.S. are not subject to social security taxes in the home country, the totalization agreement does not apply and the earnings are subject to FICA.

Most totalization agreements stipulate that a foreign national employee must retain his own home country employer to retain home country coverage. The employee must be temporarily transferred by that employer, for a period generally not expected to exceed five years. An employee who qualifies as a detached worker will obtain a "certificate of coverage" from the home country's social security tax authorities. The home country employer must continue to impose social security taxes on U.S. earnings to exempt the individual...