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Factoring business costs: Social security taxes in the US, Canada and Europe

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Dateline: Tbilisi, Georgia

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 as a freelancer is to work for a foreign employer. 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 pajamas. At a certain point, it makes sense to set up a base and it makes sense to find a quality base that is affordable.

And it pays to do your homework. My friend Justin Cook at EmpireFlippers once hired people in the Philippines and — between hiring and paying all the taxes — it was a total mess. Businesses just aren’t hiring people in the Philippines because the system is in disarray.

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 labor 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 you 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 employee and employer 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 €385 per month.

Bosnia: Employees pay 33% of gross salary and the employer contributes an additional 10.5%. The average wage is roughly €609 a month.

Bulgaria: The employee pays a total of 12.9% and the employer contributes 17.9%. The average wage in Bulgaria is €346.

Canada: Canadian employers pay 7.58% to social security and employees pay 6.83%. The average wage in Canada is USD$4327 per month.

Czech Republic: Employers pay 34% to social security and employees contribute 11%. The average wage is €762 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 employer.

Georgia: Social Security contributions were eliminated in Georgia on January 1, 2008. The average wage for a Georgian employee is €428 per month.

Hungary:: Employers in Hungary contribute 18.5% to social security while employees pay 28.5%. The average wage is €514 per month.

Latvia: Employees pay 11% of the wage and the employer pays 24.09%. The average wage in Latvia €575 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 €554 a month.

Macedonia: Employers in Macedonia must pay 7.3% for health insurance, 0.5% for additional health insurance, 18% for pension and disability and 1.2% for unemployment. Employees pay 27% of their gross salary in Social Security contributions. The average wage for an employee in Macedonia is €354 per month.

Moldova: Companies pay 23% to social security and employees pay 6%. The average wage is only €218 per month.

Montenegro: The employer pays 10.3% to Social Security and the employee pays 24%. The average salary for a Montenegrin worker is €484 a month.

Poland:: Employers in Poland contribute 20.12% to social security while employees pay 22.71%. The average way in Poland is €730 per month.

Portugal:: Employers in Portugal are required to pay 23.75% in social security taxes and employees pay 11%. The average wage in Portugal is €985 a month.

Romania: The employer contributes approximately 20% while the employee pays about 15%. The average wage in Romania is €423 per month.

Serbia: Employees pay 13% to the state pension fund, 6.5% to the state health fund, and 0.5% to the unemployment fund. Employers contribute 11% to the state pension fund, 6.5% to the state health fund, and 0.5% to the unemployment fund. The average salary for a Serbian employee is €363 per month.

Slovenia:: Employers contribute 16.% to social security and employees pay 22.1%. The average wage is €1,003 per month.

United Kingdom: Social security taxes are relatively low in the UK, with employers paying 13.8% and employees paying 12%. The average wage in the UK is roughly £2,000 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 $4,892 per month.


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