CCA 1105039: Totalization agreement requires employer to pay U.S. FICA taxes

Plain-English summary

Chief Counsel advice considered an employer's obligation under a totalization agreement when the employer had paid foreign social security taxes instead of U.S. FICA taxes. The advice concluded that the agreement required the employer to pay U.S. FICA taxes, regardless of whether foreign social security taxes had also been paid. It noted that the employer could seek a refund of foreign taxes if available, but could not elect between U.S. and foreign social security taxation in these circumstances. The advice also noted that failing to pay U.S. social security tax and issue Forms W-2 could harm an employee's social security coverage.

Ruling snapshot

• Question: Must an employer pay U.S. FICA taxes when a totalization agreement makes the employment subject to U.S. FICA, even if foreign social security taxes were paid?
• Outcome: Advice given.
• Key authorities: IRC § 3121(l) and (z); the applicable totalization agreement.

Full text (IRS public release)

ID: CCA-401348-10 Number: 201105039
Release Date: 2/4/2011
Office: -------------
UILC: 3121.00-00

From: -----------------
Sent: Thursday, April 01, 2010 1:48 PM
To: --------------------
Cc: ----------------------------
Subject: RE: Counsel assistance Requestl ---------

In looking at the totalization agreement, it seems pretty clear here that the employer must pay only US
social security taxes, and not foreign social security taxes. In light of the fact that the totalization
agreement provides that they are liable for United States FICA taxes, I would say FICA taxes should be
collected regardless of whether they paid foreign social security taxes. An employer does not have an
election whether to pay US or foreign social security tax if it is employment for United States FICA tax
purposes under the totalization agreement. (As you may know, section 3121(l) provides an election to
pay US FICA taxes in situations where foreign social security taxes would otherwise apply but this is a
prospective election and in any event, is not applicable here.) The employer owes United States FICA
taxes if it is employment under the totalization agreement. The employer should file for a refund of the
foreign social security tax to the extent that is available if it wants to avoid double taxation..

The employer's failure to pay US social security tax and failure to issue Forms W-2 could have an
adverse effect on the employee's social security coverage. Also, section 3121(z) has indicated a
Congressional concern that the IRS fully enforce the FICA tax liability of employers with respect to
employees working overseas. To have an IRS policy of FICA tax forgiveness where the employer pays
foreign social security erroneously rather than United States social security would be difficult to defend,
and without legal justification as far as I know.