Income Tax Witholding
Your wages for working abroad may subject to federal income tax withholding. You can have the withholding reduced by the expected tax benefit for the foreign earned income exclusions by submitting Form 673, or stopped if the wages are subject to foreign income tax withholding.
How do I have federal tax withholding reduced for the expected benefit of the exclusions?
If you want to reduce your federal income withheld for the expected benefit of the foreign earned income exclusions, you should submit Form 673 to your payroll department. You can download this form from the IRS.
Will my FICA be reduced if I submit Form 673?
No. The Form 673 only applies to federal income tax withholding. FICA is based on the location of your employer, your country of employment and other factors. See our page on FICA for more information.
Does Form 673 go the IRS?
Can I voluntarily pay Social Security while working for a foreign employer abroad?
No. This form goes only to your payroll department to let them know how to withhold federal income tax on your paycheck. Nothing is shown on your W-2 indicating that you worked abroad. You still have to file a tax return with the IRS to show that you qualified for the exclusions.
How does the withholding calculation work when I submit Form 673?
Your withholding will be reduced by the tax benefit of the foreign earned income exclusions on a pay period by pay period basis. For example, if you are paid monthly, your employer will divide the annual amount of the exclusions by 12 (for 2007, $85,700 / 12 = $7,142). The tax benefit of the exclusions on this amount will be determined using the withholding tables. Your federal income tax withheld will then be reduced by up to this amount.
The 673 does not just stop withholding until you have earned the amount of the annual exclusions.
What happens if submit Form 673 then don't qualify for the foreign earned income exclusions?
If you submit Form 673 to payroll but then don't qualify for the exclusions, you will owe tax on your tax return. You may also have an underpayment of estimated tax penalty. In practice, we find that the IRS often abates (forgives) the penalty if you explain on Form 2210 that you expected to qualify for the exclusions and provide the reason why did not. Interest is always charged on tax paid after April 15th - even when you are living overseas, and will not be abated in this situation.
If I qualify for the exclusions but have tax withheld, will I get the refund?
The IRS refunds a tax overpayment when you qualify for the exclusions just like any other refund. There are no special delays just because you are claiming the exclusions.
Should I submit Form 673?
Whether or not you submit Form 673, it is important to have the money available to pay your taxes in case you don't qualify for the exclusions. If you do submit Form 673, we typically suggest that you set-aside about $1,400 a month to pay your taxes. If you cannot save the money or your family situation otherwise makes it unlikely the funds will be there in an emergency, do not complete the form.
If you are covered by a company sponsored tax reimbursement program where you have hypothetical tax withheld and the company pays any tax due resulting from your foreign assignment, you should submit the paperwork they request. There is no reason to have both hypothetical and federal income tax withheld on the same wages when the tax risk has been transferred to the company.
If I have foreign tax withheld, will federal income tax be withheld also?
If your wages are subject to foreign tax withholding, then you are not subject to federal income tax withholding. If you are having both taxes withheld from your pay, let your payroll department know so that they can "turn off" FIT withholding for you. This is not indicated on the W-4 form. This is an on/off determination. If you are in a country with a lower tax rate than the US (such as Singapore), then you could owe tax when you file your return.
Should I adjust my allowances on Form W-4 when working abroad?
You may want to reduce your allowances on line 5 of your Form W-4 to be closer to the actual exemptions claimed on your tax return. This provides a more conservative (safer) withholding amount.
While working abroad, you may no longer qualify for many credits available in the US. The personal allowances worksheet on Form W-4 assumes that you will still qualify for many of these credits,. however.
My spouse also works - which withholding status should I show on the W-4?
We suggest that select "Married, but withhold at the higher Single rate" on line 3 of your W-4. You will also need to check your withholding closely throughout the year. Married filing separate is not an option for tax withholding.
Should I put "Exempt" on my W-4 if I am working on overseas?
You should not put Exempt on line 7 of Form W-4 just because you are working abroad. This line has nothing to do with a foreign assignment. If you do complete this line, be sure to read the form instructions to see if you qualify.
- Qualifying for the Foreign Earned Income Exclusions
- ►General Questions
- ►Physical Presence Test
- ►Counting Days in the US, Abroad and Traveling
- ►Bona Fide Residence
- ►War Zones and Military Contractors
- Income and Social Tax Withholding
- ►Social Security and Medicare Taxes
- ►Income Tax Withholding
- ►Hypothetical Tax
- ►Totalization Agreements
- ►Due Dates and Extensions
- ►Expatriate Tax Forms
- ►IRS Addresses
- ►Other Resources