Owing self-employment tax to the U.S.

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I have a question and a bit of confusion regarding the payment of U.S. self-employment tax vs. German Rentenversicherung.

 

I have been teaching English freelance since 2011 and have filed both my US and German taxes the last 2 years and have paid the U.S. self-employment tax for both years (about 15%). I did not register with the German Rentenversicherung due to not being sure whether it was absolutely necessary and also not being sure if I was going to stay here for the long haul.

 

It turns out now that I am going to stay here for the near and distant future. My question is this: since I have been paying the U.S. self-employment tax and not registered with the German Rentenversicherung, what happens if one day I do become known to the German Rentenversicherung (either by choice or by audit)? Will I be forced to make back payments, even though I paid into the U.S. Social security system?

 

Thanks in advance for any insight into this matter.

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Consult a German tax accountant to get a better answer than someone is likely to give you online. My layman's guess is that you would, unfortunately, be forced to make back payments.

 

 

@expat71:

 

"There is, to the best of my knowledge, no way to avoid paying self-employment tax without paying into the German public system. If anyone else has done it otherwise, I'd love to hear about it. "

 

OK. Now hear this:

 

US tax law (IRC § 1401©), exempts from US self-employment tax, SE income that is "subject to" the social security system of a country with which the US has a social security "totalization" treaty. IRS regs require the eligible taxpayer to submit a "certificate of coverage" from that US treaty partner. There is no obligation to actually pay into the foreign system provided that you are "subject to" or "covered by" that system; e.g. by virtue of residence, etc.. Neither of these phrases equates to "obliged to pay into".

 

Your advice to obtain the Vordruck from the DRV attesting to the fact of your coverage under the German system is correct and good advice (although as a practical matter the IRS almost never insists on seeing it).

 

You will, find, however, that those self-employed persons who apply for the German certificate of coverage will get the certificate of coverage (in about 4-6 weeks after they apply) regardless whether they have actually paid a single Euro cent into the German social security system.

 

That includes persons like myself who have been self-employed in Germany since 1986, have always reported every cent of ALL my income to the US including self-employment income, and have never paid a cent in US self-employment tax on any amounts earned in Germany because I have always been entitled to the certificate of coverage.

 

 

 

I'm an American citizen working as a freelancer in Germany, and in the process of trying to catch up with taxes etc, I sent the following letter to the Deutsche Rentenversicherung - Bund and got the D/USA 101-A back about two weeks later without any problems. I've never registered or paid into the German pension system. According to my tax advisor, this should free me from the SE tax since (at least my kind of) freelancers are not required to pay into the pension fund in Germany.

 

Doesn't sound like something that would survive the scrutiny of even a correspondence audit by the IRS. Caveat payor.

 

EDIT: if you look at the IRS instructions on payment of SE taxes, it's pretty clear that a US citizen freelancer resident in Germany should be paying them if they are not required to pay into the German system.

 

Disclaimer: nothing in this post should be construed as legal, financial, tax or accounting advice. Please be sure to consult qualified professionals for that, especially since I may be mistaken.

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I have a question and a bit of confusion regarding the payment of U.S. self-employment tax vs. German Rentenversicherung.

 

I have been teaching English freelance since 2011 and have filed both my US and German taxes the last 2 years and have paid the U.S. self-employment tax for both years (about 15%). I did not register with the German Rentenversicherung due to not being sure whether it was absolutely necessary and also not being sure if I was going to stay here for the long haul.

 

It turns out now that I am going to stay here for the near and distant future. My question is this: since I have been paying the U.S. self-employment tax and not registered with the German Rentenversicherung, what happens if one day I do become known to the German Rentenversicherung (either by choice or by audit)? Will I be forced to make back payments, even though I paid into the U.S. Social security system?

 

Thanks in advance for any insight into this matter.

 

A dodgy situation indeed. Many freelancers do not need to pay into the German Rentenversicherung ( and a new law intending to force self-employed to pay into it has been postponed ..for a while at least ). However, there is an old law on the books for freelance teachers (of any kind, even golf teachers..)..who are supposed to pay into the thing...

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Ok, thanks for the responses. I will talk to a tax accountant about this then..

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Hi again everyone. Just a quick update and another question...The German tax accountant I spoke with said that tax accountants do not deal with the matter of Rentenversicherung, so he couldn't help me and advised me to contact a Rentenberater. However, the one Rentenberater I found in my area hasn't responded to the message I left for them. Does anyone here know of a Rentenberater who would be knowledgeable in this area (U.S. self -employment tax vs. Deutsche Rentenversicherung)? It's OK if they don't speak English, I can speak German. I would really like to talk to someone and get some advice before I go to the Deutsche Rentenversicherung.

 

Also, I understand the Deutsche Rentenversicherung calculates the amount owed based on your monthly income. Does anyone know how they actually verify this? I have my past tax statements, but they of course don't show the monthly income. Do they ask for your bank statements or for past invoices?

 

Thank you once again for any information.

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@Kyliek

 

What I said in my earlier post remains valid.

 

"Subject to" the German social security system by virtue of residence and source of income pursuant to a Social Security "Totalization" treaty is the standard for exemption from US social security contributions set forth in §1401© of the Internal Revenue Code. The obligation to actually pay into the system is not a condition for exemption from US contribution obligations.

 

And no, the Germans will not pay a pension to those who have not contributed to their system. They may let them live in a homeless shelter but they won't be getting a pension.

 

(And those who have paid into the German system may find that their previously or subsequently earned Social Security pension is much less than they expected because of the so-called windfall elimination provisions.)

 

The D/USA 101 "certificate of coverage" obtained from the Deutsche Rentenversicherung is sufficient substantiation.

 

But you need to be more circumspect in your case - but not because of a US contribution liability.

 

My - inexpert - understanding is that under some obscure legislation passed early in 20th century and still on the books, freelance teachers (and, oddly enough, providers of home nursing care) are exceptions to the general rule that self-employed individuals are not subject to contribute to the German social security system.

 

So proceed with caution.

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Straightpoop, you mentioned earlier that you have been a freelancer in Germany since 1986. In all that time, have you ever been audited by the IRS? If so, did the topic of SE tax contributions ever come up? I ask because your interpretation of "subject to" doesn't sound likely to me. Here's what the 1040 SE instructions say:

 

If your self-employment income is exempt from SE tax, you should get a statement from the appropriate agency of the foreign country verifying that your self-employment income is subject to social security coverage in that country.

 

Source: 040 SE instructions

 

I don't see how self-employment income in Germany would be "subject to social security coverage if someone isn't paying into the German pensions system despite having taxable self-employment income, and most freelancers don't have to (teachers being a notable exception).

 

In addition, here's what the SSA has to say about the US/Germany totalization agreement:

 

Certificates for self-employed people.

 

If you are self-employed and would normally have to pay Social Security taxes to both the U.S. and German systems, you can establish your exemption from one of the taxes by writing to:

 

 

  • If you will be covered by the United States (see table above), the U.S. Social Security Administration at the address in "Certificates for employees" section above.
  • If you will be covered by Germany (see table above), the local German Sickness Fund that collects your German Social Security taxes.

Be sure to provide the following information in your letter:

 

 

  • Full name;
  • Date and place of birth;
  • Citizenship;
  • Country of permanent residence;
  • U.S. and/or German Social Security number;
  • Nature of self-employment activity;
  • Dates the activity was or will be performed; and
  • Name and address of your trade or business in both countries.

 

 

 

Effective date of coverage exemption

The certificate of coverage you receive from one country will show the effective date of your exemption from paying Social Security taxes in the other country. Generally, this will be the date you began working in the other country...

 

However, a self-employed person must attach a photocopy of the certificate to his or her income tax return each year as proof of the U.S. exemption.

 

Source: US/Germany totalization agreement

 

Summary of agreement rules

The following table whether your work is covered under the U.S. or German Social Security system. If you are covered under U.S. Social Security, you and your employer (if you are an employee) must pay U.S. Social Security taxes. If you are covered under the German system, you and your employer (if you are an employee) must pay German Social Security taxes. "Certificate of coverage" section explains how to get a form from the country where you are covered that will prove you are exempt in the other country.

 

Again, maybe I'm missing something here, but I don't see how you or any other US citizen freelancer resident in Germany for an extended period of time can legally claim to owe payments to neither system. Looks like someone in such a situation would owe pension contributions to Germany. If what you have posted is correct, then the DVR is issuing certificates of exemption to US citizens that they should not be issuing because the US citizen (assuming they are not a freelancer working as a teacher) isn't required by German law to pay into the German pension system.

 

Disclaimer: nothing in this post should be construed as legal, financial, tax or accounting advice. Please be sure to consult qualified professionals for that, especially since I may be mistaken.

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@conquistador

 

The standard of exemption that you accurately quote from the IRS instructions - which derive from 26 USC §1401©- is "subject to".

 

"Subject to" does not mean "obliged to make monetary contributions in XYZ amount to".

 

It means only that pursuant to treaty the US has waived its authority to impose its SE taxes where the individual concerned is "subject to" whatever rules and obligations the German legislature may impose upon that individual.

 

Neither the language of the totalization treaty nor the Internal Revenue Code conditions that waiver and deferral to Germany's jurisdiction upon Germany exercising its jurisdiction in any given way.

 

Thus, Germany can impose its social security contribution obligation upon all of those "subject to" its social security legislation, or some of them, none of them, on some professions but not others, etc.

 

The Certificate of coverage D/USA 101 issued by the DRV is simply that: a certification that the individual is "covered by" or "subject to" Germany's social security legislation - whatever that might be in that individual's case.

 

That is all the IRS requires to substantiate "coverage" by Germany and exemption from US SE obligations.

 

Similarly, a US company sending its employee to Germany for less than a 5 year period can issue that employee a "certificate of coverage" so that the employee is not obligated to pay into the German system during his temporary assignment. That "certificate of coverage" does not certify that any, or any particular amount was actually paid into the US social security system by that employee and, indeed, in the case of certain individual claiming exemption on religious grounds, it is quite possible that they pay nothing into the US social security system on their income earned in Germany. Nevertheless, that person is deemed "covered by" or "subject to" US social security law under the treaty and Germany will not impose its obligations on them regardless of the fact that US social security law exempts them.

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Thanks for the explanation, but in my layman's opinion, that doesn't square with the lack of compulsory German contributions for, say, a freelance accountant or translator (no one can seriously say that they're "covered" on the basis of their freelance earnings). I doubt that there was any intent to exempt anyone from paying into either country's public pension system. At any rate, it may be irrelevant because most US citizens resident overseas would anyhow have reached the minimum 40 quarters for eligibility for US Social Security and probably also have worked as employees for some or most of their working life.

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Freelancers do not have to pay into the German retirement fund. I have been working Freelance for ten years and have not payed any money into the governmental retirement system. I pay into my own retirement fund which I turn around and use it as a company tax write off. I believe you need to talk to a financial expert that knows what he or she is talking about.

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Hi, I'm wrestling with a similar situation and becoming thoroughly confused in the process ... My husband and I will be moving to Germany within the next few months, he will have employment there and health insurance. I an working remotely from San Francisco for a company based in Seattle, and for my taxes I'm listed as an independent contractor so have been paying self employment taxes as well as State/Federal.

 

Enough exposition: my question is whether it will be worthwhile to try to keep my US telecommute job when we move to Germany. I make approx $30K annual pre-tax. It seems like I may be paying more in taxes (to US and Germany both) to do so?

 

Thanks in advance for any insight.

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I was in the same boat: An independent contractor moving to Germany because of my husband's full-time job.

 

Yes, I had to pay social security back to the U.S. every year on my taxes until I got into this program that "forced" me to pay it to Germany instead. You wont have to pay social security to both countries, just the U.S. You probably won't be paying any income taxes to the U.S. at all because they'll be paid in Germany (depends on your income of course).

 

I found having to buy my own health insurance was the biggest financial jolt.

 

Good Luck

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@CarolynS, thank you for the response. So it sounds like I'll be paying income tax in Germany but Social Security in the US. Confusing! So your husband's health insurance didn't cover you and you had to buy your own? I hadn't given any thought to this.

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Please be aware that income taxes and self-employment taxes are two different things...You may not have to pay income taxes on your small business if you meet the foreign exclusion rules, but that may not cover the self-employment taxes. That is a separate category. It is only if you pay social security taxes in Germany where you can get away from having to pay self-employment taxes in the US.

 

Kris

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Thanks. I think what's confusing me is that I'm not actually a small business owner. I'm an independent contractor but work for the same company I worked for prior to becoming an independent contractor, it's only for tax reasons when I started working remotely out of state. The past year I've been left to work out my taxes situation on my own, what a nightmare. My employer would like to keep me on as an independent contractor after I move to Germany, but they don't have any information for me about how I should handle my taxes since this is a new situation for them as well. For instance, my checks will continue to be deposited in my US bank account. Also I've been making quarterly payments for estimated tax and then filed online at the end of the year, will I continue to do this once I move?

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Yes, self employment tax is 12.4% for social security and 2.9% for Medicare. You'll pay this to the U.S. and your income tax to Germany. I think you could volunteer to pay it to Germany but I'm not sure if that would save you any money. Self employed GERMANS aren't required to pay it, all self-employed American citizens are (to the U.S.), no matter where you live.

 

Your situation sounds just like mine. Tell your employers there's absolutely nothing different on their end. They'll send your pay to your American bank and you'll get a (what is it W2? 1040? I don't remember) at the end of the year. The same tax paperwork you got before. You'll file this with your U.S. tax return and probably not owe tax because you'll declare that you paid income tax in Germany.

 

You'll pay quarterly estimated tax to Germany.

 

And, no, a spouse's health insurance only covers you if you don't work, or work making less than 400 Euros a month. I had no idea about this either when I arrived.

 

Good Luck.

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Thanks. I think what's confusing me is that I'm not actually a small business owner. I'm an independent contractor but work for the same company I worked for prior to becoming an independent contractor, it's only for tax reasons when I started working remotely out of state. The past year I've been left to work out my taxes situation on my own, what a nightmare. My employer would like to keep me on as an independent contractor after I move to Germany, but they don't have any information for me about how I should handle my taxes since this is a new situation for them as well. For instance, my checks will continue to be deposited in my US bank account. Also I've been making quarterly payments for estimated tax and then filed online at the end of the year, will I continue to do this once I move?

 

Find a good German tax accountant- it's definitely worth it.

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I went and saw two social rights attornies after I was billed for the freelance TEACHING portion of my freelance PROFIT (unless you are employing someone else). The law is unfortunately very clear, despite many challenges to it...coaches, teachers, trainers, whatever you want to call it are legally bound to pay into it.

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@CarolynS, thank you for the info! This is certainly something we hadn't considered. Being that I don't make a lot (but more than 400 Euro / mo.) I'm starting to wonder if it isn't worth it to keep my telecommute job after we move!

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