CCA 1214023: IRS explains social security taxes for employees transferred abroad

Plain-English summary

Chief Counsel advice concluded that the second theory in the underlying question was correct. A U.S. citizen permanently transferred by an employer to work in a foreign country generally would be subject only to that country's social security taxes, even if a section 3121(l) agreement existed for the individual. The advice stated that the detached-worker rule applies only when the foreign assignment is expected to last five years or less. It also explained that a totalization agreement can relieve the employer of payments under the section 3121(l) agreement when the employee's wages are subject exclusively to foreign social security taxes.

Ruling snapshot

• Question: How does a totalization agreement interact with a section 3121(l) agreement when a U.S. citizen is permanently transferred to work abroad?
• Outcome: Advice given
• Key authorities: IRC §§ 3101(c), 3111(c), and 3121(l); Rev. Rul. 79-232; the applicable totalization agreement

Full text (IRS public release)

ID: CCA-216144-12 Number: 201214023
Release Date: 4/6/2012
Office: -------------
UILC: 3121.00-00

From: --------------------
Sent: Thursday, February 16, 2012 2:43 PM
To: ----------------------------------
Cc: ------------------------------------------------------------
Subject: RE: IRC 3121(l) as it interacts with a Totalization Agreement

The correct answer is the second theory set forth in your e-mail. If a U.S. citizen is transferred
permanently by their employer to work in a foreign country, his or her wages should be subject to only
foreign social security taxes, and not US social security, even if a section 3121(l) agreement has been
entered into with respect to that individual. The detached worker rule only applies if the employee is
transferred to work in a foreign country for five years or less. If the detached worker rule doesn't apply,
then the individual is subject only to social security taxes in the foreign country where they are working
(and is not subject to U.S. social security taxes).

Rev. Rul. 79-232, 1979-2 C.B. 359 provides that amounts paid by a domestic corporation under a section
3121(l) agreement are considered taxes for purposes of sections 3101(c) and 3111(c). Thus, to the
extent that the totalization agreement provides that the wages of an individual employee are subject
exclusively to foreign social security taxes, the employer is relieved of the obligation to make payments
under the section 3121(l) agreement for that employee. The general rule set forth in totalization
agreements is that an employee is subject to social security taxes of only the country where they are
working. The exception, under which the employee is subject to only social security taxes of the home
country from which they were sent, only applies if the employment in the foreign country is not expected
to exceed 5 years.

Hope this is helpful.