Thailand attracts expats from all over the world. But if you’re American, you must consider a few things before relocating here. The US government taxes you on income no matter where you live. So I’d like to tell you what happens with your Social Security Tax when you move to Thailand.
This article focuses on Social Security. But if you’d like to read about other tax-related topics for Americans, check out U.S Taxes for Worldly Americans: The Traveling Expat’s Guide to Living, Working, and Staying Tax Compliant Abroad written by Olivier Wagner.
Social Security Explanation
So, what is Social Security? Social Security is a government system you and your employer make equal contributions into. Social Security gives you with a pension when you retire and gives benefits if you lose your job. The IRS collects taxes and puts them in Social Security Trusts. Two Social Security Trusts exist. The first is the Federal Old-Age and Survivors Insurance Trust Fund. And the second is the Federal Disability Insurance Trust Fund. You have to pay into the system for at least 40 quarters—about 10 years—to get Social Security benefits.
But if you make more than $127,000 (in 2017) the US IRS won’t tax you. And the benefits you get depend on how much income you earned while you worked. If you work for a US company, for example, your employer deducts Social Security contributions from your wages. But if you employ yourself, you pay Social Security and Medicare at a rate of 15.3%. This is Self-Employment Tax.
The US government signed treaties called totalization agreements with other countries. If you move to and work in a country that signed a totalization agreement with the US, you give to the Social Security system of that country. When you retire, any contributions you made go into US Social Security.
But if you work in Thailand, the Social Security systems work independently. You don’t contribute to US Social Security while paying your taxes in Thailand. You still have to pay Social Security Tax. The IRS exempts wages paid on or after the effective date of totalization agreements. You can check the IRS website for a detailed explanation of the consequences of Social Security Tax abroad.
Work in a Company
If you work for an American corporation, your employer pays their share of Social Security and withholds your share. The corporation reports these withholdings on your W-2 at the end of the year.
But working for a non-US corporation, you won’t pay Social Security Tax or Self-Employment Tax. You pay Social Security only if working for an “American employer” as defined by IRC 3306(j)(3). IRC 3306(j)(3) doesn’t make a distinction based on the shareholders of such corporation. And they don’t include foreign corporations.
Foreign Earned Income Exclusion
If you work for yourself in Thailand, you can exclude up to $101,300 of foreign-earned income. You’ll have to use the Foreign Earned Income Exclusion (FEIE) to do so. But only if you meet the physical presence test or the bona fide residence test. Income earned in a foreign country denotes “foreign-earned.” For example, if you’re American but work in Thailand, you earned foreign income. If you’re American and work in New York City, your earned US income.
To qualify for the physical presence test you must spend 330 days out of a consecutive 12-month period in Thailand. The consecutive 12-month period doesn’t have to be the 12 calendar months. It could start on March 2016 and end in February 2017. You can prorate the amount of money to exclude on your taxes. To do so, add the amount of time you spent abroad during the year.
The bona fide residence test is harder. You can’t get bona fide residence just by living in a foreign country for a year. You need to be a resident of a foreign country for an uninterrupted tax year. But the length and nature of your job dictates if you’ll get the FEIE.
You need to spend at least 180 days to become a resident of a country. But the time doesn’t qualify you for the FEIE. If you spend more than 180 days in Thailand, you are a Thai resident. But you can’t exclude the Thai earned income using the FEIE.
(Note: the concept of “resident” for tax purposes is not the same per immigration law.)
The FEIE won’t save your from paying the Self-Employment Tax. Self-Employment Tax is like Social Security and Medicare for those who are self-employed. You can learn more about the self-employment tax through the International Revenue Service.
How to Avoid Paying Self-Employment Tax
To avoid paying the Self-Employment Tax, create a corporation. You pay yourself and then use the FEIE on your personal tax return. But you have to file form 5471. Form 5471 resembles a corporate tax return. But since the US doesn’t have jurisdiction over a foreign corporation, it asks the US shareholder to attach the form to their personal tax return instead. And you’re not paying Self-Employment Tax anymore.
It’s hard to file form 5471. So contact a company like 1040abroad. They deal with US international tax. Many local Enrolled Agents and CPAs don’t know how to deal with 5471s. And keep in mind: A $10,000 fine comes with any errors or un-filed 5471s.
If you want to stop paying Self-Employment Tax, create your own Board of Interest corporation in Thailand. Or create a corporation in a foreign country like Hong Kong.
You should consider the long-term consequences of paying or not paying Social Security. The system benefits you. But it’s your choice to opt out of paying Self-Employment Tax (Social Security) and not claim the benefits.
If you’re a digital nomad, you might be interest in working for a company that “hires” you and “bills” your clients. This allows you to get a work permit under Thai Immigration laws. But the IRS will still see you as self-employed, rather than an employee of the company.