How Do US Totalization Agreements Work?

U.S. totalization agreements are international accords that address Social Security issues for individuals who work in both the United States and another country. These agreements serve two main functions. They prevent dual Social Security taxation, where a worker pays taxes on the same earnings to two countries. They also help individuals qualify for benefits by allowing them to combine work credits earned under different systems.

Determining Social Security Tax Liability

When a person works in a foreign country, the “territoriality rule” applies, meaning they are subject to the Social Security taxes of the country where the work is performed. For instance, a U.S. citizen working for a local company in a partner nation would pay into that country’s social security system, not the U.S. system.

The primary exception is the “detached worker” rule for employees on temporary assignments abroad. If a U.S. employer sends an employee to work in a country with a totalization agreement, the employee may remain covered only by U.S. Social Security. This arrangement is permissible if the overseas assignment is expected to last for five years or less.

For example, a U.S. engineer sent by her American firm for a three-year project in a treaty country would continue paying U.S. Social Security and Medicare taxes. Her earnings would be exempt from similar taxes in the foreign country under the detached worker rule.

For self-employed individuals, the rules can differ slightly. A self-employed person who resides in a treaty country is subject to the Social Security laws of that country of residence. The specific terms are detailed within each agreement.

Qualifying for Social Security Benefits

Totalization agreements provide a method for individuals who have worked in multiple countries to qualify for social security benefits. Many systems, including U.S. Social Security, require a minimum number of work credits for retirement, disability, or survivor benefits. For U.S. retirement benefits, a worker needs 40 credits, which equates to 10 years of work.

These agreements allow for the “totalizing” of credits, where work periods from both countries are combined to meet eligibility requirements. If a worker has at least six U.S. credits but fewer than the 40 needed, the Social Security Administration (SSA) can count credits earned in a partner country. The foreign credits are used only to establish eligibility and are not transferred or added to the U.S. earnings record.

Once eligibility is established, the SSA calculates a partial, or “pro-rata,” benefit based solely on the earnings and credits earned in the United States. The calculation determines the full benefit amount the person would receive if their entire career had been under the U.S. system and then reduces it proportionally.

For example, a worker with 20 U.S. credits and 20 credits from a treaty country can combine them to meet the 40-credit requirement. The SSA would first calculate the theoretical full U.S. benefit. If that benefit was $1,000 per month, the actual pro-rata benefit would be $500 per month, as half of the total credits were earned in the U.S.

Required Documentation for Tax Exemption

To claim an exemption from foreign social security taxes, a worker or their employer must obtain a Certificate of Coverage. This document, issued by the home country’s social security agency, confirms the worker is subject to its laws. For a U.S. worker abroad, the certificate is issued by the Social Security Administration (SSA) as proof for foreign authorities.

Applying for a U.S. Certificate of Coverage requires submitting specific information to the SSA, including:

• The worker’s full legal name and U.S. Social Security number
• The worker’s date and place of birth, and country of citizenship
• The name and address of the employer in both the U.S. and the foreign country
• The start and expected end dates of the temporary assignment abroad

The employer completes and submits the application on behalf of the employee. Official forms can be found on the Social Security Administration’s website.

The Application Process

Applications for a Certificate of Coverage can be submitted online or mailed to the Social Security Administration’s Office of Earnings and International Operations in Baltimore, Maryland. Upon approval, the SSA issues the certificate. The employer or worker must then provide a copy to the tax authorities in the foreign country to exempt the worker’s earnings from their social security contributions.

The procedure for applying for totalized benefits is separate from obtaining a tax exemption. An individual who may be eligible for benefits based on combined credits should contact the SSA directly to file a claim. Those residing in the United States can contact any local Social Security office. If living abroad, they should contact the nearest U.S. Embassy or consulate or the SSA’s Office of International Operations.