Generally, the United States taxes worldwide income. However, for services provided as an employee outside the U.S. such taxes apply if one of the following conditions is met.
First, the taxpayer is working for an American employer. For purposes of this condition an American employer is: 1) the U.S. government or any of its instrumentalities; 2) an individual who is a resident of the United States; 3) a partnership of which at least two-thirds of the partners are U.S. residents; 4) a trust of which all the trustees are U.S. residents; and 5) a corporation organized under the laws of the United States, any U.S. state, or any U.S. territorial holding (i.e. District of Columbia, Puerto Rico, etc.)
Second, the taxpayer performs services on or in connection with an American vessel or aircraft and either 1) entered into the employment contract within the United States, or 2) the vessel or aircraft touches at a U.S. port while the taxpayer is aboard. A common example is a Jones Act seaman. The Jones act defines a seaman as a person who has an employment related connection to the vessel and such connection is significant to the vessel’s mission or function.
Third, the taxpayer is working in a country with which the United States has entered into a binational social security agreement (also known as a Totalization Agreement), and the agreement provides that foreign employment is subject to U.S. social security and Medicare taxes.
Finally, the taxpayer works for a foreign affiliate of an American employer under a voluntary agreement entered into between the American employer and the U.S. Treasury Department. A foreign affiliate of an American employer is defined as any foreign entity in which an American employer has directly or indirectly at least a 10% interest. For a corporation, the 10% interest must be in voting stock whereas any other entity the 10% interest must be in profits.
It should be noted the social security tax does not apply to the value of meals and lodging provided to the taxpayer for the convenience of the employer.
