Working Abroad: What Could Go Wrong?
If you’re a U.S. citizen living or working abroad, taxes may not be on the top of your mind. Many countries have a totalization agreement, but what if your current country doesn’t have one? Latvia is one of the countries that you can experience double taxation in. You may be hit with a double tax burden that few people talk about: foreign social security taxes.
Avoiding Double Taxation
The U.S. has what are called Totalization Agreements with many countries to prevent you from having to pay on social security taxes twice. But not all countries have one–and Latvia is one of them.
If you’re working in Latvia and you’re a tax resident, you may be required to contribute to the Latvian social security system, even if your income is from a U.S. based business such as an LLC, LLP, or C Corp.
The social tax rate for Latvia is over 34%. And that’s on top of your U.S. self-employment taxes of 15.3%. This is where the double taxation comes into play in Latvia.
No Credit for Social Taxes in the U.S.
To give you some other background information, social security taxes are not income taxes. The U.S. only allows a foreign tax credit for income taxes.
So, if you pay high social taxes in Latvia, you won’t be able to subtract them from what you owe to the IRS. This means you might be paying ~34% to Latvia and 15.3% to the U.S. combined.
How Can You Avoid This?
If you’re moving or already working in Latvia (or another country not in a TA), here’s how you can look out for the future.
- Check if the country has a totalization Agreement with the U.S. (Check Here)
- Work with a tax advisor familiar with both U.S. and local tax laws
- Re-evaluate your business structure–some entities could trigger foreign social taxes more than others
- Don’t assume distributions or payments are “tax-free” just because they’re coming from a U.S. business
Research Before The Move
Understanding how totalization agreements work is one of the most overlooked aspects when moving abroad. Most people aren’t thinking of how they’ll be taxed in their new country. It’s important to review any guidelines and requirements to understand how you’ll be taxed. Take the time to get ahead to avoid any tax surprises later.
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