The following post on drawing Social Security while working abroad is courtesy of a long time client, friend, and expat, who ran into this issue running his tour company. The bottom line is that the Social Security Administration has found a way to cut your benefits if you’re living and working abroad.
Here’s the setup:
Bill is turning 62 this year and wants to draw “early” social security. Like most of us, he’s not sure that the money he paid in over the years will be there when he’s 70 and he wants his cash now.
Also like most Americans living abroad, he plans to work. He’s not the type to sit on a beach sipping Margaritas or play golf all day. Like many of us with wanderlust, he’s an entrepreneur at heart.
Also, Bill qualifies for the Foreign Earned Income Exclusion, so he can draw a salary of up to $101,300for 2016 free of Federal income tax. Because he’ll take that salary out of an offshore company, he won’t pay self employment taxes of 15%.
And here comes the rub - Section 811 of the Social Security Handbook:
Section 811 - Work Outside the U.S.
If you are under age 70 and work in a foreign country for 45 hours in any one month your benefit is suspended for that month, unless the work is covered by U.S. social security tax. It doesn't matter how much your earnings are, even if the totals for the year or month are under the regular limits (Sections 801-802.3). Disability benefits are not subject to this rule. Benefits for any dependent on your account are also suspended, with three exceptions: a divorced spouse, divorced for at least 2 years; if the worker was deported, if the worker is an alien whose benefits are suspended due to the alien non-payment of benefits law. This law prohibits payments, including disability benefits, to aliens who reside out of the country for more than 6 months.
This means that an expat under age 70 may work only 44 hours a month if they’re drawing Social Security and don’t want to pay self employment tax. Since you’re are not obligated to pay SE tax on salary from a foreign corporation, Section 811 amounts to a 15% penalty on those living and working abroad and drawing early Social Security.
Standard limits also apply to early Social Security payments taken by expats. Every dollar you earn over the limits will reduce your early Social Security payment. For 2016, this limit is $15,720 ($1,310 per month) and goes up each year. If you’re collecting early Social Security, your benefits are reduced by $1 for every $2 you earn over the limit.
All of this means that Bill can earn up to $15,000 in salary from his offshore company without reducing his Social Security distribution (which is $20,000 a year). He will pay 15% self employment tax on his $15,000 salary, so the Social Security Administration is penalizing him $2,250 for living abroad.
Be careful if you’re cutting it close. The SSA can cut off payments if they think you're earning more than you should. And, when they cut you off, they stop payment entirely.
That is to say, the SSA doesn’t reduce each monthly check by a percentage. They withhold several months' of checks until their computers say the reduction is paid off. If you need your salary and your Social Security to pay your bills, this can create a major hardship.
Note that none of this affects Bill’s ability to take the Foreign Earned Income Exclusion. He’s still entitled to the full $101,300 exclusion. So, his entire $15,000 in salary from his offshore company is free from Federal income tax.
This is one of the reasons I always write that the Foreign Earned Income Exclusion eliminates up to $101,300 of Federal income tax. Self Employment tax is not income tax and can apply to expats in a number of situations.
For example, even if you qualify for the FEIE, but you operate through a US company or aren’t incorporated offshore, you’ll pay SE tax on your business profits. The only way around this is to incorporate offshore and take your salary through that entity.
I hope you have found this article helpful. Thanks again to Bill for bringing this to our attention.
For more on how to setup an offshore company, you might take a read through Step by Step Guide to Taking Your Business Offshore