Owing self-employment tax to the U.S.

116 posts in this topic

Well, all I can say is that if you are filing a tax return where you have self-employment income, the IRS is going to be looking for either SE tax being paid to them (which is not covered under the Foreign Earned Income Credit) or the Certificate of Coverage, showing that the taxpayer is covered for social security in their host country.

 

Expect correspondence from the IRS if this is not attached. If the German Sickness fund provides the taxpayer with the certificate of coverage even if nothing has been paid (i.e. voluntary since it doesn't come out of an employee check),then that is what it is. But the IRS is going to want to have that certificate to allow that exemption. The only proof that the IRS expects,, is this certificate.

 

Peace out!

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It's time again to file.  Since last year I figured out how to report depreciation of business property (computers, cameras, etc) with tax software, using MACRS, ADS, Half Year, Straight Line.

But now I'm not sure what to do when I retire the property.

Where am I supposed to enter the remaining undepreciated value of business property that is disposed / abandoned / given away?

I've searched for several hours in several publications, and they all say to treat abandoned property as "Ordinary Loss", but don't say how or which form to report it on.

 

And for property that has been sold, does it go on 4979 Sales of Business Property part III?

 

The 2014 form seems to have changed since 2013.   Section II used to say Ordinary Gains and Losses, but now it also says "held for less than 1 year", so abandoned property that was being depreciated won't be placed here by the tax software.  Section III now says "Gains, held more than 1 year".  But abandoned property is a loss, so when I enter some abandoned properties, it comes out as zero, and won't show a negative number for the loss.

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I'd like to revive this thread. It's quite clear to me reading through everything that, as a self-employed (web developer) U.S. citizen living in Germany, I can be exempt from paying U.S. SE tax by showing the IRS the Certificate of Coverage. Now, the debate never seemed fully resolved regarding actually having to pay into the German system or not. I'm not worried much about that but rather how this all affects permanent residence applications. My understanding is that in order to apply for PR, you'll need to prove 60 months worth of contributions to public pension. As a self-employed person, I'd much prefer building my own retirement in the form of investment however it seems this may not be good enough to be awarded permanent residence.

 

The second point I'd like to get clarification on is in the totalization agreement. Here again, wording plays an important role and it's impossible for me to interpret what is meant. The table of agreements states:

 

You are self-employed and you:

  • Work only in the U.S.

U.S.

  • Normally work in the U.S. but transfer your business activity to Germany for five years or less

U.S.

  • Work only in Germany

Germany

  • Normally work in Germany but transfer your business activity to the U.S. for five years or less

Germany

 

My biggest issue with this is how do you define working in when dealing with remote, digical work? My income largely comes from U.S. clients however I am physically working in Germany. In the U.S., when I moved from NY to CA with a NY S Corp, I still needed to have the S Corp file to do business in California because I was physically located there even when my income came from NY. I would assume this same theory would apply meaning that I should pay social contributions to Germany rather than the U.S. as I am physically performing the work in Germany. However, I am unsure. I intend on calling the IRS to ask them (they are usually incredibly helpful on the phone).

 

That said, my biggest concern at this point is permanent residence, especially if the U.S. claims SE tax is a must on my income which then disqualifies me from permanent residence in Germany.

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14 hours ago, scabadaska said:

My understanding is that in order to apply for PR, you'll need to prove 60 months worth of contributions to public pension.

 

This is news to me.  I have had permanent residence in Germany for more than 35 years and have been self-employed that entire time with no contributions to either the US or German social security systems.  No doubt things may have changed since I applied and obtained PR status but I would double check the source of this information if I were you.

 

For income tax and social security contribution purposes (both German and US) the geopoltical source of your self-employment income is where you are physically present when performing the service for which you are compensated. Neither the location of your customer, the currency in which you are paid or the location of the account that you use to receive payment are of any relevance. That said, if you are an employee working only temporarily (less than 5 years) in the other country and have a certificate of coverage from your "home country" employer, then even though your income remains foreign sourced it can nevertheless be exempted from local social security contributions and remain subject to your "home country" social security system for the duration of the "temporary" employment abroad. 

 

The language of the US tax code and the social security totalization treaty are clear with respect to what must be shown to obtain a certificate of coverage:  work that is "subject to" the social security laws of the nation from which the certificate is sought.  The language you quote from the info pamphlet on the Totalization Treaty should be your guide.  If you work only in Germany then you are "subject" only to Germany's social security system.  Right now, a large number if not most self-employed persons "subject to" Germany's social security system are not obligated to contribute to that system.  That can, of course, change at the stroke of a legislative pen.  Similarly, not all persons "subject to" the US social security system are obligated to contribute to that system.  Although the US exceptions to the obligation to contribute are comparatively few (e.g. members of certain religious orders, etc.) they do exist.

 

If you apply for a German certificate of coverage D-USA/101A you will not be asked to supply a German social security number or any evidence that you have ever contibuted to the German social security system nor will the certificate of coverage itself make any reference to contributions or non-contributions. I am a former US tax professional with more than 35 years experience.  I know of no case in which the IRS, having received such a certificate of coverage from Germany has ever asked for proof of actual contributions to the German social security system before allowing exemption from US social security (self-employment) tax.

 

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4 hours ago, Straightpoop said:

 

This is news to me.  I have had permanent residence in Germany for more than 35 years and have been self-employed that entire time with no contributions to either the US or German social security systems.  No doubt things may have changed since I applied and obtained PR status but I would double check the source of this information if I were you.

 

 

Both my husband and I had to show this when we applied for our NE in the last year. The letter from the Ausländerbehörde:

 

photo.jpg

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It's either 60 contribution months to German public pension insurance or an equivalent contribution to a private pension insurance, this is laid down in §9 Absatz 2 Nr. 3 Aufenthaltsgesetz:

 

"(2) Einem Ausländer ist die Niederlassungserlaubnis zu erteilen, wenn

3. er mindestens 60 Monate Pflichtbeiträge oder freiwillige Beiträge zur gesetzlichen Rentenversicherung geleistet hat oder Aufwendungen für einen Anspruch auf vergleichbare Leistungen einer Versicherungs- oder Versorgungseinrichtung oder eines Versicherungsunternehmens nachweist; berufliche Ausfallzeiten auf Grund von Kinderbetreuung oder häuslicher Pflege werden entsprechend angerechnet,"

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Quote

For income tax and social security contribution purposes (both German and US) the geopoltical source of your self-employment income is where you are physically present when performing the service for which you are compensated. Neither the location of your customer, the currency in which you are paid or the location of the account that you use to receive payment are of any relevance.

 

Thank you for this bit. I called SS last night and had a manager confirm this was indeed the case. Physically present in Germany means I am obligated to Germany even if all my self-employment income is U.S. sourced.

 

@PandaMunich Thank you for the info regarding the ability to pay a private pension. I suppose it depends on the person you get on any given day but I have heard a few times that it's tricky with private pensions because it has to be up to German specifics. This could potentially exclude some sort of pension scheme paid into in the U.S. for example. It was explained to me that often times they'll request documentation of an exact guarantee which most pensions schemes can not prove. This is coming from my (likely lack of) understanding of the situation. I really don't know much about it.

 

That said, I am currently with TKK and, as far as I understand, I can make voluntary contributions to Deutsche Rentenversicherung. It sounds like, one way or another though, I need to get some sort of pension program worked out ASAP. What would the benefit be of private vs public?

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If you're under 50, any money you pay into public pension insurance is money down the drain, you won't get back out of it what you paid in.

The public pension pot is the place German politicians dip into whenever they need any money, up till now they have stolen over 700 billion € from it, for details see the Teufel-Tabelle (data collected by an engineer called Otto Teufel).

 

The solution is to get a cheap German pension insurance, ideally with one of the direct insurers like CosmosDirekt or Europa or Asstel (less overhead than normal insurers with many offices, i.e. a better return on investment) with a fixed pay-out sum. But ask first at whatever Amt is responsible for the Niederlassungserlaubnis in Berlin, whether they would accept that specific pension insurance, i.e. don't enter into the contract unless they say it's ok.

 

I've even heard of cases where the Amt accepted private pension insurance plans you could terminate, i.e. after getting the Niederlassungserlaubnis, people terminated that insurance again and basically only lost a few months' contributions.

But that was Munich, no idea whether this would work in Berlin.

In those cases, these people from the very start chose the direct insurance with the highest Rückkaufwert, knowing full well that they would give it back in a few months' time.

 

Common sense would have dictated that the Amt insist on something like a Rürup-Rente where you can't get any money back out of it till pension age (though come to think of it, even there you can simply stop paying in, see here).

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@PandaMunich

 

This is very interesting, indeed.  I see from the history of the Aufenthaltsgesetz that it did not come into force until 2005 - long after I was waved into the country under the old Ausländergesetz.  (I got a permanent Aufenthaltserlaubnis after only 1 year with a temporary.  When I went in to renew my 1 year (wearing a coat and tie and having the right skin color with no trace of a Turkish accent), I was asked if I wanted the 1 year extension or a permanent.  I asked what the difference was and the nice Beamte said that the one cost DM 20 and the other DM 50.00.  I said, in effect "What the hell, I'll splurge.  Give me the permanent version."  He did and I have had it ever since.

 

Putting myself into the shoes of Scabadaska and Techgirl today, however, I might suggest that they offer proof of contributions to a foreign social security system (e.g. the US or UK).  I think that it is no coincidence that the statute requires 60 months contributions to the gesetzliche Rentenversicherung.  That "Wartezeit" is the minimum base qualifying period for a pension.

 

If I had contributed enough to the pension system of, e.g., the US or UK that met the minimum for a pension under the social legislation I would provide a statement from the officials of that country to that effect and offer that proof as "equivalent". If the Behörde balk at this, then ask them why under their Social Security Totalization Treaty agreements with the UK and the US they agree to recognize contributions to the foreign system as equivalent to the German for purposes of combining (totalizing) the two together to achieve an overall minimum qualification - and a subsequent fractional benefit from both countries.

 

Similarly, if either Scabadaska or Techgirl has made contributions to a foreign system and/or the German system which, if "totalized" would qualify for a pension, then I think they'd have a good argument that they have met the equivalency test of the statute.

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Thank you PandaMunich. Is the requirement for 60 months then proof that you will pay for 60 months or proof that you have already contributed 60 months? I ask because I'm not sure how I understand the cases where they took pensions for a few months to get the Niederlassungserlaubnis and then cancel if the requirement is showing 60 months paid.

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Thank you for the additional info Straightpoop. I have been paying into the U.S. SS for the last 20 years of my life pretty much uninterrupted. This is certainly something to consider because, as you say, there is a totalization agreement in place which should indicate a sufficient pension from the U.S. in my old age. I have over four years before any of this becomes an issue anyhow but thought it wise to get a head start on the information.

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My requirement was that I show that I had paid 60 months into the system. I'm required to contribute as an employee; nonetheless, my Social Security contributions, while counting toward my overall pension here in Germany (under the totalization agreement), didn't count toward the 60 months. Only the actual record of money going out of my German account into the RV system counted.

 

Like I said, doesn't matter for me, since I'm gesetzliche plichtversichert in RV. My biggest issue is then showing the US that my freelance work on top of my "day job" doesn't trigger an ADDITIONAL payment into the US Social Security scheme as well.

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For public pension insurance you have to have previously paid in for at least 60 months.

For private pension insurance, they have an amount stuck in a drawer which says how much "60 public pension month contributions" are worth, e.g. they are worth a capital of 40,000€. They then asked the people to enter into a pension insurance with a guaranteed pay-out at age 65 of at least 40,000€ + x (x depended on how old the applicant was).

 

So yes, strangely enough as it sounds, showing such a newly entered insurance contract was deemed sufficient, they didn't need to have already paid in into that private pension plan at all.

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Thank you so much for providing this information. It does seem odd giving our treaties that they will not count SS contributions towards residence. Likewise for private pensions that don't meet their standard. I mean, money in old age is money in old age. Not sure why it specifically needs to be a German pension scheme. I'll certain look into the private insurances suggested by PandaMunich as well. Straightpoop raises some really good points though regarding the totalization agreement.

 

Thanks for the tip Panda.

 

@Straightpoop Sending a PM.

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Unfortunately, I still haven't figured out how to reply to a PM so for anyone interested here again is a sample request for a Certificate of Coverage D/USA 101A.  There is no specific form required but this model covers the information specifically addressed in guidance given by the US Social Security administration. There are also other model applications appearing elsewhere in various threads on this topic on TT:

 

SAMPLE

(Your Name and Address Here)

Deutsche Rentenversicherung Nord

Friedrich-Ebert-Damm 245

22159 Hamburg

 

OR:

Deutsche Rentenversicherung Bund

BKZ 5017

10704 Berlin

 

 

 

Datum:        

 

Betr:    Antrag auf Versicherungsbescheinigung gemäß Artikel 6.1 des Deutsch-Amerikanischen Abkommen über Soziale Sicherheit

            "Form D/USA 101 A"

 

Sehr geehrte Damen und Herren,

 

ich beantrage hiermit die Zusendung des og. Formulars (des sogenannten "Certificate of Coverage") für den Zeitraum:

 

xx.xx.xxxx bis xx.xx.xxxx

 

Seit ______ habe ich in der Bundesrepublik Deutschland meinen gewöhnlichen Aufenthalt und Wohnsitz. Ich bin seit ______ selbstständig erwerbstätig als ________________________________.  Ich habe außerhalb Deutschland keine Betriebstätte bzw. feste Basis.

 

Ich bin in Deutschland unbeschränkt Einkommensteuerpflichtig und zwar seit _____.

 

Zur Person:

 

Name und Vorname(n):                                             

U.S. Sozialversicherungsnummer:                             

Ggf. deutsche Rentenversicherungsnummer:  [          ]

Staatsangehörigkeit:   

Geburtsdatum:                       

Geburtsort:                 

Name des Betriebs:    

Art des Betriebs:        

Anschrift des Betriebs:          

 

mit freundlichen Grüßen,

 

 

 

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@amforss

 

It is not absolutely clear but some years back the Hamburg address was given jurisdiction of these things and that address should be used.  It is entirely possible that the Berlin address will work too albeit with a delay - a long delay if it's like everything else in Berlin.

 

If you send it to Hamburg and don't hear back in 8 weeks,  then bite the bullet and send it again to Berlin.

 

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@Straightpoop, and everyone else on this thread

 

I'd like to publicly thank Straightpoop for sticking to his/her guns on this topic. After reading everything here, and googling elsewhere, I'm convinced.

 

If you are self-employed in Germany, and are not required by Germany to pay Rentenversicherung, you still do not need to pay self-employment tax in the US.

 

And although the laws quoted here were fairly clear, I found something else that I don't think I saw in this thread yet.

 

Take a look at this page on the social security website, which summarizes the contents of H.R. 743, The Social Security Protection Act Of 2004, which is now law.

 

https://www.ssa.gov/legislation/legis_bulletin_030404.html

 

Way down the page, it says:

 

Clarification Respecting The FICA And SECA Tax Exemptions For An Individual Whose Earnings Are Subject To The Laws Of A Totalization Agreement Partner

  • Would provide clear legal authority to exempt a worker's earnings from U.S. Social Security tax in cases where their earnings were subject to a foreign country's laws in accordance with a U.S. totalization agreement, but the foreign country's law does not require compulsory contributions with respect to those earnings.
  • Would be effective upon enactment.

 

If that's not enough for you, you can download the "GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 108TH CONGRESS" here:

 

https://www.jct.gov/publications.html?func=startdown&id=2314

 

It explains this all in more detail. I included the corresponding text from the document below if you'd like to read it here instead.

 

I am not a financial or tax advisor. It's certainly possible this law has been overridden since 2004, etc. Do your own research. Just stating an opinion.

 

Thanks straightpoop!!!

-StephenGermany

 

P.S. Some of you on this thread might need to go yell at your tax advisors...

 

 

B. Clarification Respecting the FICA and SECA Tax Exemptions for an Individual Whose Earnings Are Subject to the
Laws of a Totalization Agreement Partner (sec. 415 of the Act and secs. 1401(c), 3101(c), and 3111(c) of the Code)

 

Present and Prior Law

 

Under the Federal Insurance Contributions Act (‘‘FICA’’), which is part of the Code, a tax is imposed on the wages paid by an employer
to an employee.120 FICA tax consists of two parts: (1) old age, survivor and disability insurance (‘‘OASDI’’), which correlates
to the Social Security program that provides monthly benefits after retirement, disability, or death; and (2) Medicare hospital insurance
(‘‘HI’’). The OASDI tax rate is 6.2 percent on both the employee and employer (for a total rate of 12.4 percent). The OASDI
tax rate applies to compensation up to the OASDI wage base ($87,900 for 2004). The HI tax rate is 1.45 percent on both the employee
and the employer (for a total rate of 2.9 percent). Unlike the OASDI tax, the HI tax is not limited to a specific amount of compensation.

FICA tax generally applies only to employees, not to individuals engaged in a trade or business. Instead, such individuals are subject
to tax under the Self-Employment Compensation Act (‘‘SECA’’) on their self-employment income. Like FICA tax, SECA tax consists
of two parts, OASDI and HI. Under the Social Security Act, an individual receives credit for his or her wages and self-employment income,

which is used to determine eligibility for monthly Social Security benefits and Medicare coverage.

 

The United States may enter into agreements (referred to as ‘‘totalization’’ agreements) with foreign countries (referred to as ‘‘totalization
agreement partners’’) to coordinate coverage and contributions (or taxes) under the Social Security program with similar programs
of other countries.122 These agreements generally eliminate dual social security coverage and taxes for the same work and
earnings. Wages and self-employment income are exempt from FICA and SECA to the extent that, under a totalization agreement
with a foreign country, the wages or self-employment income is subject to taxes or contributions for similar purposes under the Social
Security system of the foreign country.


Reasons for Change


The Congress noted that, under U.S. totalization agreements, a person’s work is generally subject to the Social Security laws of the

country in which the work is performed. The Congress further noted that, in most cases, the worker (whether subject to the laws
of the United States or the other country) is compulsorily covered and required to pay contributions in accordance with the laws of
that country; in some instances, however, work that would be compulsorily covered in the United States is excluded from compulsory
coverage in the other country (such as Germany). The Congress was concerned that, in such cases, the IRS had questioned
the exemption from U.S. Social Security tax for workers who elect not to make contributions to the foreign country’s retirement system.
The Congress believed that any question should be removed regarding the exemption, in a manner consistent with the general
philosophy behind the coverage rules of totalization agreements.


Explanation of Provision

 

Under the Act, wages and self-employment income are exempt from FICA and SECA to the extent that, under a totalization
agreement with a foreign country, the wages or self-employment income is subject exclusively to the laws applicable to the Social Security
system of the foreign country. As a result, an individual’s earnings are exempt from FICA and SECA in cases in which the
earnings are subject to a foreign country’s Social Security system in accordance with a totalization agreement, but the foreign country’s
law does not require compulsory contributions on those earnings. The Act establishes that such earnings are exempt from FICA
and SECA regardless of whether the individual elects to make contributions to the foreign country’s Social Security system.


Effective Date
The provision is effective on the date of enactment (March 2, 2004).

 

-BOOM-

 

 

 

 

 

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Follow up question regarding the Certificate of Coverage... does everyone request this form each January, so they have a certificate showing the start date as when they originally began work in Germany, and the end is 12/31/2016 (or whatever the previous year is), so that they get it in time each year to file their US taxes? Or can you keep using the same letter showing the start date year after year? Thanks.

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