II. Social Security Taxes: The Bane of the Existence of Self-employed U.S. Citizens Who Work Abroad –
A hostile environment faces the person who, alone or with one or two others, goes into business for himself. In recent years, various factors have increased the adversity the small businessperson faces. Escalating employment taxes represent a significant barrier to the economic survival of these individuals.
This section explores the self-employment taxes that face a U.S. citizen working abroad as a self-employed individual.
a. The Employment Tax Regime
Three taxes comprise employment taxes: (1) social security; (2) unemployment; and (3) wage withholding taxes. This article addresses the impact that social security taxes have on the self-employed individual. Taxes paid by employers and employees under the Federal Insurance Contributions Act (“FICA”) and by the self-employed under the Self-Employment Contributions Act (“SECA”) fund the nation’s social security program.
As discussed above, FICA tax has two parts: Old-Age, Survivor, and Disability Insurance (“OASDI”) and Hospital Insurance (HI). SECA tax is payable on the net earnings from the self-employed person’s business. The main difference between SECA tax and FICA tax is that the self-employed individual pays the entire SECA amount with no contribution from a second participant. However, a deduction is allowed, equal to one-half of the individual’s self-employment tax liability.
FICA and SECA taxes represent a significant burden to small businesses. Particularly in the start-up phase, they contribute to the high rate of new business failures. The very small or new business lacks the established income stream and client base – not to mention the buying and bargaining power – of older, larger companies. Employment taxes, with ever-increasing rates, make their survival tenuous at best.