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The part of Section 3121 that you quoted seems to support the American company withholding Social Security and Medicare since she was employed (B) outside the United States by a citizen or resident of the United States as an employee for an American Employer.
Section 3121(b) does state ...the term, "employment" means any service,...which is designated as employment or recognized as equivalent to employment under an agreement entered into under section 233 of the Social Security Act; except that such term shall not include-- ...(4) service performed by an individual on or in connection with a vessel not an American vessel (probably true)..., if (A) the individual is employed on and in connection with such vessel or aircraft, when outside the United States (yes) AND (B)(i) such individual is not a citizen of the United States (but she is) or (ii) the employer is not an American employer (but it is). It does not appear that she meets either of the conditions of (B) which means that her employer should have deducted her half of Social Security and Medicare.

I hate to have her overpay her taxes, but the safest thing seems to be to have her pay her half of Social Security and Medicare.

Thanks very much for pointing me to Section 3121.

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