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The Internal Revenue Service (IRS) has released two new International Practice Units (IPUs) on payroll taxes payable by US citizens and resident aliens working abroad for a US employer, and on the requirement for the payment of those taxes by similar individuals who are self-employed.
IPUs produced by the IRS are intended to provide explanations of international tax rules to the agency's examiners, but can also add to taxpayers' understanding of the agency's approach to particular topics.
Federal Insurance Contributions Act (FICA) taxes are a US federal payroll tax, covering Social Security taxes (including old-age, survivors, and disability insurance) and Medicare taxes (hospital insurance tax). They are generally withheld from the employee's wages and paid on their behalf to the IRS.
The IPU confirms that, as a general rule, FICA taxes must be paid by US citizens and resident aliens who work abroad for an American employer. They must also be paid on behalf of US citizens and resident aliens who work abroad for a foreign affiliate of an American employer, if the American employer agreed with the IRS to pay FICA taxes on all US citizens and resident aliens employed by its foreign affiliate.
It is noted that Social Security Totalization Agreements, which have been entered into between the United States and some foreign countries to prevent the payment of social security taxes to two jurisdictions on the same wage income, can also govern whether FICA taxes must be paid into the United States.
On the other hand, the Self-Employment Contributions Act (SECA) provides for taxes similar to the FICA taxes payable by wage earners. Under SECA, all US citizens and resident aliens who are self-employed are responsible for paying self-employment tax if their net earnings from self-employment equal or exceed USD400.
The obligation to pay self-employment tax arises whether the self-employment activities occur in or outside the United States and whether the individual resides in or outside the United States during the period of self-employment. To determine whether the USD400 threshold is met, all self-employment income is taken into account even if it is not subject to income tax due to the foreign earned income exclusion.
Although the term "resident" is not defined, residency for FICA and SECA taxes is generally the same as residency for income tax purposes.
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