Social Security Act, Sections 203(c) and 203(d)
Regulations No.4, Sections 404.417-404.418, 404.1901-404.1905
TN 12 (12-04)
RS 02605.001 The Work Tests - Outside the U.S.
The primary purpose of RSI benefits is the partial replacement of earnings lost due to the retirement or death of the NH. The Act provides for a deduction from benefits when the NH or beneficiary engages in employment or self-employment (SE) beyond a certain limit. To determine the amount of benefits for beneficiaries who have not attained full retirement age (FRA), apply the Annual Earnings Test (AET) (see RS 02501.001 ff.) and Foreign Work Test (FWT) as explained below. The FWT applies to work performed outside the United States which is not covered by the U.S. Social Security program and, for which differences in the values of foreign currencies make it administratively impractical to apply a test based on the dollar amount of earnings.
1. Foreign Work Test
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:
2. Outside the U.S.
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:
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.).
C. POLICY - APPLICABILITY OF THE WORK TESTS
1. Annual Earnings Test
Earnings from the following activities outside the U.S. are subject to the AET: (see RS 02605.020E.)
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.);
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).
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).
2. Exclusions and Deductions For Income Earned Abroad
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.)
NOTE: Prior to 1984, the FWT did not apply to income excluded under the AET as foreign earned income. However, beginning with taxable year 1984, foreign earned income derived from self-employment activities by citizens of the U.S. generally became covered under title II of the Act, regardless of residence outside the United States, meaning that the AET, rather than the FWT, applied in determining whether to impose deductions on account of such activities.
3. Foreign Work Test
The following activities are subject to the FWT (see RS 02605.020D.):
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);
Service in the exercise of the ministry outside the U.S. by a nonresident alien;
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
SE of a U.S. citizen or resident alien which is exempted from coverage by a totalization agreement (see RS 02605.030).
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.
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.)
4. Activity Not Subject To Work Tests
a. Neither FWT nor the AET Applies
Neither the FWT nor the AET applies to activity which would, if carried on in the U.S., result only in income which is specifically excepted from coverage:
Jorge, an alien residing in Mexico, rents out land there to sharecroppers and does not materially participate in the farming operations. Since Jorge's income constitutes rentals from real estate (one of the exclusions referred to above) and is not income from a trade or business, neither the FWT nor the AET applies.
D. PROCEDURE - BENEFICIARY ALLEGES WORKING FOR NO PAY
If a beneficiary claims work as a volunteer, determine the existence of:
NOTE: If the activity is not employment or does not constitute a trade or business, no deductions apply.