Paying social security and Medicare taxes

[brianbbc]

My daughter being an American (and Canadian) living in Canada obtained employment while attending university. She made around $2000 cdn this year. My understanding that unless she meets the minimum gross income, she will not need to file a 1040. But, is she required to pay social security and Medicare taxes on this small amount? She worked as a contractor employee for the city teaching gymnastics so it is not an American company, but she’d probably be considered self employed. she will do a cra filing to get the social benefits.

[nelsona]

There is a minimum income below which she does not have to pay SE tax in US on her return. More later

[nelsona]

The limit is only US$400, and even though she has not met the required income to file a 1040, she must do so because of the SE tax.

Now, technically she can have that tax waived with a letter of compliance from service Canada (or retraite Quebec in QC), However, my experience is that if the worker doesn't pay any QPP/CPP, they won't issue the letter. The threshold for paying CPP is $3500 in earnings, so she is likely CPP exempt.

Thus although she shouldn't be paying SE tax because she was working and lining in Canada, she can't get the exemption letter, so will have to pay SE tax but no income tax, in US. My son has been in this situation for three years with a little side job he gets every summer.

[brianbbc]

I was able to find an answer on the forum. Generally, under the terms of Binational Social Security Agreements (or Totalization Agreements), self employed persons who are subject to dual taxation are only required to pay social security taxes or their equivalent in the country in which they reside.
Accordingly, U.S. citizens resident in Canada are required to pay Canada Pension Plan (CPP) premiums and are therefore exempt from Self Employment Tax.
My concern was she made over $400 US as self employed, with irs requirements to pay SE over these amounts. But because of the treaty, this won’t be necessary seeing how she is liable to the cra. Does this seem about right?

[brianbbc]

I posted then saw your last reply. Seems like a pain to get that letter even though the treaty is pretty clear. She owes about $130 so it’s not much. Am I correct in assuming that once she does pay for the required 40 quarters of work, she would be entitled to the benefits even though all the income was earned outside the usa

[brianbbc]

Interestingly enough I spoke with the CRA social security unit and they reported they will send a certificate of coverage even if she didn’t pay into CPP. The key is she was “subject” to it as the money was earned income, as opposed to dividend income. It didn’t matter if she actually paid cpp for that year. . She didn’t sound like most cra agents and actually knew what she was talking about in regards to the treaty rules, so we’ll see what happens…

[ND]

"although she shouldn't be paying SE tax because she was working and lining in Canada, she can't get the exemption letter, so will have to pay SE tax but no income tax, in US."

The simple work-around (to not actually obtaining https://www.canada.ca/en/revenue-agency ... cpt56.html) is to report ZERO SE tax on 1040 and attach a statement explaining the Totalization agreement exemption. Should IRS request it, you'll generally be no worse off.

[nelsona]

Tried that. Had to pay anyways. IRS overrode my Zero. And my experience is only with QPP. If CPP is more cooperative, great.

[brianbbc]

Suprisingly this agent was pretty informed and they send the certificate based on residency and earned income, regardless of whether you actually earned enough to pay CPP. Maybe that department is more educated and capable than most at the cra. She did admit, in her experience, that the IRS does accept T4 statements identifying CPP contributions also as proof also but I’m thinking that could be up to the irs agent’s discretion do. Either way, I can get the certificate for my daughter

[nelsona]

T4's are not going to report self-employment income. If she gets a T4, then simply report it as wages on the 1040. Self employment income is tracked by the contractor herself.

Get the certificate, and if she intends to keep this side job, you can request the certificate to be valid for up to five years.

[nelsona]

She may get a T4A as proof of self-employment. Of course, the payor will not have withheld any CPP contributions on that, since that is calculated by the taxpayer herself, based on NET self-employment income on form T2125

[MaggieA]

ND suggested that "The simple work-around ... is to report ZERO SE tax on 1040 and attach a statement explaining the Totalization agreement exemption." nelsona reported that didn't work for him. FWIW I did this for six years, after moving back to Canada from US. I'm now retired so it's no longer necessary. I didn't even know about the certificate one can get from CRA. So I would say, it doesn't hurt to try ND's and my work-around. It does succeed sometimes.