Factoring Business Costs: Understanding Social Security Taxes by Country
November 15, 2024
Just a couple of weeks ago, we talked about how seniors can still receive their Social Security benefits while living overseas. After all, those who’ve paid into the system their whole life should enjoy the benefits in retirement, no matter where they choose to live.
But there is another side to that coin that involves all those who continue to pay into the system: employees and employers. In fact, even people who work overseas may still be on the hook for Social Security taxes.
One of the big mistakes US citizens make when they go overseas is that they freelance. While they are indeed overseas and qualify for the Foreign Earned Income Exclusion, this does not exempt them from paying Social Security tax.
Income tax and Social Security tax are two different beasts. So, though you may be working overseas and not paying income tax, you still owe 12.4% of self-employment tax, plus the Medicare tax. If you’re not paying Federal or State income tax you can’t deduct the Medicare tax, which means you’re paying the full boat of 15.3%.
There are two main ways to be exempt from Social Security taxes. The first is to have a foreign employer. The cut-and-dry way to do this is as part of a formal arrangement, for example, working for GE in their international office in Hong Kong. A less formal approach is to work for a foreign employer as a freelancer.
Since you are a freelancer, you won’t have the advantage of having an entire international company backing you, but you will be a de facto employee of a foreign-based company in one sense.
The second solution is to have your own offshore business. This, of course, brings with it many more questions and priorities that should be set straight.
Priorities for the Global Businessman
Obviously, the goal when you’re starting a business is to grow it to be as profitable as possible. While relying on freelancers spread across the world can work for a time, at some point you’ll need to set up more formal operations.
I don’t know of many $200 million dollar businesses run out of Chiang Mai where everyone works wherever they want, waking up at 10am and spending the day in their pyjamas.
At a certain point, it makes sense to set up a base. And, it makes sense to find a quality base that is affordable – but it pays to do your homework.
At least in Europe and the West, you can manage and navigate the system. However, if you want to hire the people there, you’re going to pay a bit more. Obviously, you can hire them as nomads and not pay, but you have to do it within the laws of that country.
Wherever you choose to set up your business, here are the four factors you should look for when choosing a base:
1. Affordability of the workforce: You don’t want to shy away from a place where the taxes may be a bit higher, but labour is better quality and less expensive.
2. Accessibility: Does location matter for your business? Are you shipping to a certain region or trying to market to a specific part of the world that would make the location an issue for your business?
3. A pro-business mindset in the government: Even if taxes are low, it doesn’t do you much good if the government goes around telling you that ‘you didn’t build that’.
4. The tax burden: Weigh the total cost of hiring people, their productivity and how much you will be paying Social Security taxes for those employees in the country where you choose to set up your base.
Social Security Taxes: A Country-by-Country Analysis
To give you a few statistics to go off, let’s take a look at the various tax rates and average wage in various countries.
Albania
This Balkan country takes social security and health insurance taxes from employment, civil and management income.
Employees contribute 9.5% and the employer pays 15%. Both employees and employers pay 1.7% for health insurance. The self-employed pay 23% for social security and 7% for health insurance.
The average wage for an Albanian worker is $822 per month.
Bosnia
Employees pay 31% of gross salary and the employer contributes an additional 10.5%. The average wage is roughly $926 a month.
Bulgaria
The employee pays a total of 10.58% and the employer contributes 14.82%. The average wage in Bulgaria is $946.
Canada
Canadian employers pay 7.58% to social security and employees pay 6.83%. The average wage in Canada is USD$5,079 per month.
Czech Republic
Employers pay 34% to social security and employees contribute 11%. The average wage is $1,771 a month.
Estonia
The employer pays 33% of social security before gross wage while the employee pays 1.6%. There is also an unemployment insurance tax, of which 2.4% is paid by the employee and 0.8% is paid by the employer.
Georgia
Social Security contributions were eliminated in Georgia on January 1, 2008. The average wage for a Georgian employee is $528 per month.
Hungary
Employers in Hungary contribute 18.5% to social security while employees pay 28.5%. The average wage is $1,192 per month.
Latvia
Employees pay 10.5% of the wage and the employer pays 23.59%. The average wage in Latvia $1,759 a month.
Lithuania
Employee contributions to social security are withheld from their salary at a rate of 3% (or 4%, if making supplementary contributions in the pension system). The employer pays a rate ranging from 27.98% to 29.6%, depending on the type of employer.
Average wages in Lithuania are currently at $2,115 a month.
Macedonia
Employers in Macedonia must pay 7.5% for health insurance, 0.5% for additional health insurance, 18.8% for pension and disability and 1.2% for unemployment. Employees pay 28% of their gross salary in Social Security contributions.
The average wage for an employee in Macedonia is $813 per month.
Moldova
Companies pay 23% to social security and employees pay 6%. The average wage is only $507 per month.
Montenegro
The employer pays 10.3% to Social Security and the employee pays 24%. The average salary for a Montenegrin worker is $928 a month.
Poland
Employers in Poland contribute 19.21% – 22.41% to social security while employees pay 13.71%. The average way in Poland is $1,417 per month.
Portugal
Employers in Portugal are required to pay 23.75% in social security taxes and employees pay 11%. The average salary in Portugal is $1,782 per month.
Romania
The employee contributes approximately 35% while the employer might pay up to 10.25% in certain situations. The average wage in Romania is $1,306 per month.
Serbia
Employees pay 14% to the state pension and disability fund, 5.15% to the state health fund, and 0.75% to the unemployment fund. Employers contribute 10% to the state pension and disability fund and 5.15% to the state health fund.
The average salary for a Serbian employee is $925 per month.
Slovenia
Employers contribute 16.10% to social security and employees pay 22.1%. The average wage is $2,612 per month.
United Kingdom
Social security taxes are relatively low in the UK, with employers paying 13.8% and employees paying 8%. The average wage in the UK is roughly $4,184 per month.
United States
Social security is currently taxed at a rate of 6.2% for the employer and 6.2% for the employee, or 12.4% total. Medicare is taxed at a rate of 1.45% for the employer and 1.45% for the employee, or 2.9% total. If you are self-employed, you pay both.
So, let’s be honest, as far as the rest of the world goes, it’s pretty cheap. However, the average wage in the United States is $6,455 per month.
Social Security Taxes by Country: FAQs
While the US has totalization agreements with some countries to avoid double taxation, it doesn’t mean your Social Security benefits are tax-free. Many countries still tax them as regular income. However, some countries have tax treaties or specific exemptions that might apply.
Yes, there are a few countries where US Social Security benefits might not be taxed. These can include countries with territorial tax systems or specific exclusions for foreign-sourced income. However, the rules can be complex and depend on your residency status, tax treaties and other factors.
Social Security tax rates vary significantly across popular expat destinations. For instance, in some European countries, the combined employer and employee contributions can exceed 40% of the employee’s salary. In contrast, some countries in Latin America or Asia might have significantly lower rates.
It’s tricky to definitively crown one country with the ‘highest’ Social Security, as systems vary wildly. However, the Netherlands consistently ranks high. Their combined employer-employee contributions can exceed 45% of an employee’s salary.
Singapore uses the Central Provident Fund (CPF), which is mandatory for both employees and employers. While not technically a ‘tax’, it functions similarly to Social Security. Contribution rates depend on age and income, with the total reaching up to 37% of an employee’s salary (20% employee, 17% employer).
No, California does not tax Social Security benefits. This is a common question because some states do include Social Security as part of taxable income. However, California is not one of them.
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