Social Security Taxes: The Bane of the Existence of Self-employed U.S. Citizens Who Work Abroad – continued –
i. Existence of a Totalization Agreement
Consider the same facts as discussed above, except that the hotel that John has been contracted to design is located in Germany, not China. Unlike China, Germany has its own social insurance program. That program is similar to the U.S. social security program. In addition, a totalization agreement exists between the United States and Germany. That agreement governs every aspect of social security taxation for U.S. citizens working abroad in Germany.
Under the U.S.-Germany totalization agreement, a self-employed individual is excused from paying self-employment taxes to the United States as long as he is paying social insurance taxes to the German government. How does that change the result? Assuming John pays into the German social insurance program, he would be exempt from paying U.S. self-employment taxes.