Totalization Agreements

If a company has employees who are required to live and work in a country other than the United States, the taxation for social security changes. 

The employee may be covered by what is known as a totalization agreement or a binational social security agreement. The Payroll Department has to understand how these agreements came about, how they work and how to interpret the requirements in order to process the employee's taxation. 

U.S. social security and Medicare extends to U.S. citizens and U.S. resident aliens employed abroad by U.S. employers without regard to the duration of an employee's foreign assignment -- even if the employee has been hired abroad. 

This extraterritorial U.S. coverage frequently results in dual tax liability for the employer and employee since most countries, as a rule, impose social security contributions on anyone working in their territory. Ensuring compliance with these international standards often requires a deep understanding of labor law training.

Dual social security tax liability is a widespread problem for U.S. multinational companies and their employees because the U.S. social security program covers expatriate workers--those coming to the United States and those going abroad--to a greater extent than the programs of most other countries. For those managing these complex transitions, HR generalist expertise is vital.

The aim of all U.S. totalization agreements is to eliminate dual social security coverage and taxation while maintaining the coverage of as many workers as possible under the system of the country where they are likely to have the greatest attachment, both while working and after retirement. 

Without some means of coordinating social security coverage, people who work outside their country of origin may find themselves covered under the systems of two countries simultaneously for the same work. 

When this happens, both countries generally require the employer and employee or self-employed person to pay social security tax. Handling these complex filings is a core part of human resources compliance training courses.

Paying dual social security contributions is especially costly for companies that offer "tax equalization" arrangements for their expatriate employees. 

A firm that sends an employee to work in another country often guarantees that the assignment will not result in a reduction of the employee's after-tax income. 

Employers with tax equalization programs, therefore, typically agree to pay both the employer and employee share of host country social security taxes on behalf of their transferred employees. 

Under the tax laws of many countries, however, an employer's payment of an employee's share of a social security contribution is considered to be taxable compensation to the employee, thus increasing the employee's income tax liability. This often involves complex FLSA considerations regarding what constitutes taxable wages.

The tax equalization arrangement generally provides that the employer also will pay this additional income tax, which in turn serves to increase the employee's taxable income and tax liability even further. The employer again pays the additional tax, etc., etc.