The FWT, also used along with the AET (as defined in RS 02501.021), is the means for determining whether deductions apply to the benefits (other than disability benefits) of beneficiaries who engage in noncovered work or SE:

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  outside the U.S.

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  for more than 45 hours in a month (7 or more days prior to May 1983)

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  before the month in which they attain FRA.

Outside the U.S. means outside the territorial boundaries of the 50 States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, the Northern Mariana Islands and American Samoa. Outside the U.S. refers to the place where:

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  a worker performs his or her services, or

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  a self-employed person's trade or business is carried on.

The term does not necessarily refer to the place where the beneficiary may reside or be.

EXCEPTION: Self-employment by nonresident aliens, who are self-employed in but do not reside in Puerto Rico, the U.S. Virgin Islands, Guam or American Samoa, is considered to be outside the U.S. (see RS 02605.020D.).

Earnings from the following activities outside the U.S. are subject to the AET: (see RS 02605.020E.)

1. a. 

   Services performed (work) in an employer-employee relationship, and therefore covered for Social Security purposes (see RS 01901.010 ff.);

   (Active military or naval service of the U.S is included as “employment” in RS 01901.010 ff.);

2. b. 

   Self-employment of U.S. citizens or resident aliens outside the U.S., in a trade or business other than the exempted activities described in RS 02605.001C.4., even though there is a loss or all of the income, is excluded as foreign earned income, or as income from sources within U.S. possessions (see RS 01803.050);

   NOTE: Self-employment activity which might otherwise be covered under the U.S. Social Security system (and therefore subject to the AET) may be excluded if it is performed in a country with which the U.S. has a totalization agreement (see RS 02605.030).

3. c. 

   Services in the exercise of the ministry outside the U.S. by a U.S. citizen or a resident alien even though an exemption from coverage has been applied for and granted (see RS 01802.060).

Generally, U.S. citizens and residents are taxed on their world-wide income. However, with respect to income tax liability, the Internal Revenue Code provides special deductions or exclusions from foreign earned income of Americans working outside the U.S. (See RS 01803.050 when a taxpayer claims an exclusion or deduction or inquires about a particular situation.)

The following activities are subject to the FWT (see RS 02605.020D.):

1. a. 

   Employment (other than active service in the U.S. Armed Forces) outside the U.S. which is not covered under title II of the Act (see RS 01901.010);

2. b. 

   Service in the exercise of the ministry outside the U.S. by a nonresident alien;

3. c. 

   Self-employment (SE) of a nonresident alien (i.e., not a resident of the 50 States, District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa or the Northern Mariana Islands in a trade or business other than the exempted activities in RS 02605.001C.4.); and

4. d. 

   SE of a U.S. citizen or resident alien which is exempted from coverage by a totalization agreement (see RS 02605.030).

5. e. 

   Examples

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     Lars, an alien residing in Denmark, worked as a self-employed accountant there. Since he is a nonresident alien, and the trade or business is not an exempted activity in RS 02605.001C.4., the FWT applies.

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     Same as above, except that Lars carries on his business in Puerto Rico. As a self-employed nonresident alien who is self-employed in, but not a resident of Puerto Rico, the FWT applies (see RS 02605.020E.4.b.)