Relocating to the US? Don't Forget About Social Security TaxesBy Paul Bercovici | April 3, 2019
Historically, many Canadians have crossed the 49th parallel to live and work in the United States. With the recent coming into effect of the United States-Mexico-Canada Agreement and the trends toward increased globalization and work force mobility, the relocation of Canadians to live and work in the US is bound to continue. While it is common for Canadians who relocate to the US to focus on income tax issues, social security tax issues are often overlooked. It is important that the social security tax issues associated with such moves be considered, especially in light of the fact that social security taxes in both countries often account for a significant portion of the overall tax burden imposed on individual taxpayers.
BRIEF OVERVIEW OF THE US SOCIAL SECURITY TAX SYSTEM
While many commentators question whether the US social security tax system can remain solvent, for the time being it still exists. Politically, it may be next to impossible to eliminate the social security system, particularly with so many “baby boomers” (i.e., voters) already collecting or poised to collect social security benefits in the near future. Social security coverage provides retirement benefits, survivors and disability benefits and medical insurance (Medicare) benefits.
Under the current system, employees are responsible for paying one-half of required social security and Medicare contributions and employers are responsible for paying the other half. Self-employed individuals are responsible for paying the entire amount of social security and Medicare contributions but are entitled to relief in the form of an “above-the-line” deduction for one-half of the social security and Medicare taxes that they pay. The term “above-the-line” deduction means that the amount is deducted from gross income in determining the taxpayer’s adjusted gross income (“AGI”).
For 2019, the maximum amount of wages subject to social security tax is $132,900. Employees and employers each pay social security tax at a rate of 6.2%. Therefore, the maximum amount of social security tax paid by an employee and employer in 2019 is $8,239.80 (i.e., 6.2% of 132,900). Self-employed individuals pay social security tax at a 12.4% rate up to the $132,900 limit but do get some relief in the form of an “above-the-line” deduction for one-half of the social security tax paid. The Medicare tax is imposed at the rate of 1.45% each for employees and employers, or 2.9% for self-employed individuals, and is not subject to a wage limit. In addition, individuals with earned income in excess of $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9% in Medicare taxes.
In order to become entitled to receive social security benefits, an individual must accrue at least forty “credits”. An individual accrues one “credit” for each calendar quarter worked. Therefore, in order to be entitled to claim social security benefits an individual must have contributed to the social security system for at least ten years.
THE CANADA-US SOCIAL SECURITY TAX TREATY
As a general rule, an individual is required to contribute to the social security tax system of the country where the individual lives and works. Therefore, as a general rule, a Canadian individual who lives and works in the US would be required to contribute to the US social security system.
Canada and the US entered into a social security tax treaty on August 1, 1984 (the “U.S.-Canadian Social Security Agreement” or the “Agreement”). The US also entered into an “understanding” with the Province of Quebec, effective August 1, 1984. The terms of the US-Quebec “understanding” are very similar to the terms of the U.S.-Canadian Social Security Agreement.
Social security tax treaties, like income tax treaties, supersede the domestic law of the countries that are parties to a particular agreement. Social security tax treaties are commonly referred to as “totalization agreements”. The primary purpose of social security tax treaties is to ensure that employees and self-employed individuals are not required to pay into the social security tax systems of both countries for the same work or be permitted to collect social security benefits under both systems. The U.S.-Canadian Social Security Agreement also provides that individuals who intend to live and work in the host country for five years or less are required to continue to pay into their home country system and not into the host country system.
The full text of the U.S.-Canadian Social Security Agreement and Description of the Agreement are available on the Social Security Administration website at ssa.gov/international/totalization_agreements and on Taxnet Pro.¹
KEY PROVISIONS OF THE US-CANADA SOCIAL SECURITY AGREEMENT
Part II, Article V, paragraph 1² of the Agreement ensures that an individual will not be subject to both US and Canadian social security taxes for the same work by providing that a Canadian employee who works in the US shall only be required to contribute to the US social security system with respect to such work.
Part II, Article V, paragraph 6³ of the Agreement provides that earnings from self-employment are subject to social security taxes where the self-employed individual lives and works.
Part II, Article V, subparagraph 2(a)⁴ provides that where a Canadian employee is sent by his or her Canadian employer to work in the US for the Canadian employer or an affiliate of the Canadian employer for a period of time that is not expected to exceed five years, such Canadian employee is required to continue to pay into the Canadian social security tax system and not into the US system. This provision is commonly referred to as the “detached worker” exception and is extremely important because, as noted earlier, in order for individuals to be entitled to receive benefits under the US social security system they must contribute into the US system for a minimum of ten years. In a worst case scenario, a “detached worker” who mistakenly pays into the US system instead of continuing to pay into the Canadian system could live and work in the US for as many as 19 quarters (five years less one calendar quarter), contribute to the US social security system (and not the Canadian system) for all 19 quarters and not be eligible to receive US social security benefits because they had not contributed to the US system for a minimum of 40 quarters.
“Detached workers” are required to have their Canadian employer apply for a Certificate of Coverage from the Canada Revenue Agency (the “CRA”).⁵ A Certificate of Coverage issued by the CRA establishes that the “detached worker” remains subject to the coverage provisions of the Canada Pension Plan during their anticipated five-year or less period of residence in the US and that they are exempt from having to pay social security taxes on the same earnings to the US. Canadians who expect to live and work in the US for five years or less are well advised to ask their Canadian employer to submit the request for a Certificate of Coverage well in advance of their anticipated temporary relocation to the US. Certificates of Coverage are not required to be filed with the Internal Revenue Service (“IRS”) but should be retained by the “detached worker’s employer in case of an audit by the IRS.
There is also provision for self-employed persons who would otherwise be subject to social security taxes in both countries to apply for Certificates of Coverage. Self-employed persons who are exempt from US social security taxes are required to attach a photocopy of the Certificate of Coverage to their income tax return each year as proof of exemption from US social security taxes.
It should also be noted that the Description to the U.S.-Canadian Social Security Agreement provides a chart which summarizes the liability for Canadian and US social security taxes based on an individual’s particular work status and the anticipated duration of their stay in the host country.
Social security tax liability is often overlooked when Canadians temporarily or permanently relocate to the US to live and work. As noted, social security tax liability can be quite significant. Canadians who intend to permanently relocate to the US to live and work will generally become subject to US social security taxes for work done subsequent to their relocation to the US. In such cases, certain provisions of the U.S.-Canadian Social Security Agreement ensure that such an individual will not be required to also contribute to the Canadian social security system. It is also crucial to bear in mind that Canadians who are sent by their Canadian employer to work in the US for the Canadian employer or an affiliate of the Canadian employer are required to continue to pay into the Canadian system, and not to pay into the US system. This result is achieved by applying for a Certificate of Coverage from the CRA. The issuance of a Certificate of Coverage in such circumstances is especially important in light of the requirement that an individual does not become eligible to collect benefits under the US system unless they have contributed to the US system for a minimum of 40 quarters.
This article originally appeared in the March 2019 issue of the Taxes & Wealth Management publication by Thompson Reuters.
² Part II, Article V, paragraph 1 provides that “[e]xcept as otherwise provided in this Article, an employed person who works in the territory of one of the Contracting States shall, in respect of that work, be subject to the laws of only that Contracting State.”
³ Part II, Article V, paragraph 6 provides that “[w]here, but for this Article, a person would be covered under the laws of both Contracting States in respect of earnings from self-employment, that person shall, in respect thereof, be subject only to the laws of Canada if that person is considered to be resident in Canada for the purposes of the relevant provisions of those laws, and only to United States laws in any other case.”
⁴ Part II, Article V, subparagraph 2(a) provides that “[w]here a person who is normally employed in the territory of one Contracting State and who is covered under its laws in respect of work performed for an employer having a place of business in that territory is sent by that employer to work for the same employer in the territory of the other Contracting State, the person shall be subject to the laws of only the first Contracting State in respect of that work, as if it were performed in the territory of the first Contracting State. The preceding sentence shall apply provided that the period of work in the territory of the other Contracting State is not expected to exceed 60 months. For purposes of applying this sub-paragraph, an employer and an affiliated company of that employer (as defined under the laws of the Contracting State from which the person was sent) shall be considered one and the same, provided that the employment in the other Contracting State would have been subject to the laws on compulsory coverage of the Contracting State from which the person was sent in the absence of this Agreement.
⁵ An application for a Certificate of Coverage is made on CRA Form CPT56—Certificate of Coverage Under the Canada Pension Plan Pursuant to Article V of the Agreement on Social Security Between Canada and the United States.
About Paul Bercovici
Paul Bercovici, LL.B., is a Principal at Marks Paneth LLP. Mr. Bercovici specializes in international tax matters including advising US individuals on the income tax implications associated with working and living outside of the United States. He also advises foreign individuals on the income tax implications associated with working and living in the US. Further, he assists foreign and domestic corporations with structuring their US and offshore operations. Immediately prior to joining the firm in 2009,... READ MORE +