Employers Can't Choose Whether to Pay U.S. or Foreign Social Security Taxes

A totalization agreement is designed to eliminate duplicate Social Security taxation on wages earned by individuals who spend part of their working life in two countries. A new IRS Chief Counsel Advice (CCA) notes that employers may not elect to pay either U.S. or foreign Social Security tax if the employment is subject to U.S. FICA tax under a totalization agreement. An employer's failure to pay U.S. Social Security tax and issue W-2 forms when required could have an adverse effect on the employee's Social Security coverage. The CCA says that Congress has expressed concern about the IRS fully enforcing the FICA tax rules on employers with employees working oversees. Chief Counsel believes that to have an IRS policy of FICA tax forgiveness where the employer pays foreign Social Security erroneously, rather than U.S. Social Security taxes, would be difficult to defend and would lack legal justification. Chief Counsel notes that Code Sec. 3121(l) does allow an employer to make a prospective election to pay U.S. FICA taxes in situations where foreign Social Security taxes would otherwise apply [Chief Counsel Advice 201105039].