Working Remotely Abroad for a US Employer: W-2, FICA, Form 673

Working remotely abroad for a US company: which country taxes the W-2 pay?

Both the US and the country where you work can tax it. The US taxes a US citizen's or green card holder's worldwide income wherever they live (Publication 54), and the host country may tax the same pay under its own law. Double income tax is usually relieved on the US return through the foreign earned income exclusion (up to $132,900) or the foreign tax credit. Social security is a separate tax with separate rules: an American employer keeps charging US Social Security and Medicare abroad unless a totalization agreement moves your coverage.

A totalization agreement is an agreement between the US and another country that decides which country's social security covers you; a certificate of coverage is the paper that proves it (IRS).

A case is not simple when payroll does not know where you work, you split the year between countries, the host country has no agreement with the US, you hold a green card rather than citizenship, or past returns are missing. Gather your W-2s, pay slips, a calendar of where you worked each day, any foreign tax returns or assessments, and any certificate of coverage.

If you live in Canada, see working across the border instead.

Does a US W-2 still count as foreign earned income?

Pay for the days you work abroad is foreign-source, even on a US W-2; it counts as foreign earned income for the exclusion only if you qualify. Pay is sourced where you perform the work, not where the employer is or where the money lands: the IRS says it does not matter that a US employer pays you or deposits the salary in a US bank account (Publication 54). Pay for days worked in the US stays US-source and cannot be excluded.

To qualify, you need a foreign tax home and either the bona fide residence or the physical presence test; a green card holder can use the bona fide residence test only as a citizen or national of a treaty country (Publication 54). See foreign earned income exclusion tests, including whether a digital nomad has a foreign tax home, and exclusion or credit for which to use.

Does my US employer keep withholding income tax, and can Form 673 stop it?

A US employer generally keeps withholding US income tax from a US citizen or green card holder working abroad. For a citizen, it may stop when it is reasonable to believe the pay will be excluded under the foreign earned income or housing exclusion, or when foreign law requires the employer to withhold foreign income tax on that pay (26 U.S.C. 3401(a)(8)(A); Publication 54).

Form 673 is the IRS sample statement a citizen gives the employer to claim that exemption. The rules that come with it:

• Citizens only. A green card holder cannot use Form 673. A citizen may write their own statement instead of using the form.
• You certify you expect to qualify. The bona fide residence box needs a completed tax year of foreign residence, so a first-year mover usually uses the physical presence box (330 full days abroad within 12 months).
• Up to the exclusions only. Pay above the exclusion and housing amounts stays subject to withholding, and the employer must count pay you get from other foreign sources toward that limit.
• US workdays stay withheld. The employer should withhold on wages for work done in the US.
• The employer can refuse it. If the employer has reason to believe you will not qualify, it must keep withholding.
• You must report changes. You certify under penalties of perjury that you will tell the employer at once if you stop qualifying (Form 673).
• Income tax only. Form 673 never stops Social Security or Medicare.

Form 673 is not an IRS ruling that the pay is excludable; the return decides that. If the exclusion turns out smaller than expected, you owe the tax with the return and may owe a penalty for underpaying estimated tax (Publication 54). If you plan to claim the foreign tax credit instead, Publication 54 says you may be able to lower withholding on Form W-4.

Do I still pay Social Security and Medicare on a W-2 while living abroad?

Yes, if you are a US citizen or resident working for an American employer. US Social Security and Medicare apply to that work outside the US the same as at home (26 U.S.C. 3121(b); IRS): 6.2% Social Security on wages up to $184,500 and 1.45% Medicare, each from you and from the employer (Publication 15). Wages over $200,000 also carry 0.9% Additional Medicare Tax, withheld from you alone. The foreign earned income exclusion does not reduce them.

An American employer is the US government, a US-resident individual, a partnership with at least two-thirds US-resident partners, a trust whose trustees are all US residents, or a corporation organized under US or state law (26 U.S.C. 3121(h)). If you move onto the payroll of the company's foreign affiliate (at least 10% owned), US coverage continues only if the American parent signed a Form 2032 agreement, which cannot be ended once made (Publication 54).

My host country charges social security too: does a totalization agreement stop the double charge?

A totalization agreement stops the double charge only if the US has one with your host country and you hold a certificate. Under an agreement you generally pay social security only where you work, but a worker temporarily sent abroad can generally stay in the US system (Publication 54). How long counts as temporary varies by agreement; for Japan it is 5 years.

Whether a remote worker who chose to move counts as temporarily "sent" or as working there permanently depends on the wording of the specific agreement, so read it before assuming US coverage continues.

The IRS says a person claiming the US exemption must secure the certificate and give it to their US employer, under the procedures in Revenue Procedures 80-56 and 84-54 and Revenue Ruling 92-9 (IRS). Only wages paid on or after the agreement's effective date can be exempt (Publication 54). Social security tax paid to an agreement country cannot be credited or deducted on the US return (Publication 514), with one exception the IRS names: France's CSG and CRDS are outside the US–France agreement, so it will not challenge a foreign tax credit for them on that ground (IRS).

The State Department lists the agreements in force, including Portugal and Spain (7 FAM 539); the Social Security Administration keeps the current list. In a country without an agreement, nothing in US law stops either charge; Publication 514 sets when a foreign tax can be credited. Self-employment tax abroad covers which countries have an agreement and how the self-employed are treated.

I worked part of the year in the US: how is one W-2 split?

One W-2 is split by workdays. Multiply the year's pay by the days you worked abroad over all days you worked; that share is foreign-source, and the rest is US-source (Publication 514). Count working days, not calendar days. Some fringe benefits, such as housing and education, are sourced differently.

The W-2 does not do this split for you. Keep a dated calendar of where you worked, with travel records to back it up. Only the foreign share can go on Form 2555 (Form 2555 instructions). US workdays can also bring a state tax claim: see remote work and state income tax and ending state residency.

Can a US employer keep paying me on a W-2 while I live abroad?

US tax law allows it: the federal withholding and Social Security rules above cover employees working abroad. Whether the arrangement is allowed is a host-country question under that country's law. Ask whether you have permission to work there, whether it requires the employer to register, run local payroll or withhold local income tax and social security, and whether your work there could create a taxable presence for the employer.

Tell payroll your work country and start date. Payroll needs them to decide US income tax withholding, apply any certificate of coverage, stop state withholding that no longer fits and meet any local duty. The employer's options are in hiring employees abroad.

I worked abroad without telling my employer and have not filed: how do I fix the US side?

File each missing year's return, with Form 2555 or Form 1116 where they apply, and tell payroll where you work now. The steps, in order:

1. Rebuild a workday calendar for each year and split each W-2 into US and foreign days.
2. Check what payroll withheld. Social Security and Medicare normally continue abroad, so compare them with the W-2; income tax and state tax may have been withheld as if you still lived in the US.
3. File the missing returns. Whether you can still choose the exclusion on a late return depends on when you file and whether tax is owed; see foreign earned income exclusion tests.
4. Tell payroll your location going forward, and give Form 673 only if you expect to qualify.
5. Check the host country's own filing and social security duties; they are a separate exposure.

If you have several unfiled years or missed foreign account reports, see the Streamlined Foreign Offshore Procedures.

Example

These examples are illustrative; amounts are in US dollars.

Engineer moves from Texas to Portugal

An engineer keeps her $150,000 W-2 job with a Texas corporation and moves to Portugal. Her employer is an American employer, so it keeps withholding Social Security at 6.2% and Medicare at 1.45% unless a certificate moves her to Portugal's system. Portugal has an agreement with the US, so a certificate from whichever system covers her settles which social security she pays. If she expects to qualify for the exclusion and gives Form 673, her employer may stop income tax withholding on pay for her work in Portugal, up to the exclusion for the part of the year she qualifies; pay for any US workdays and pay above that stay withheld.

Marketing manager in Mexico

A marketing manager on a $90,000 W-2 from a US corporation lives and works in Mexico. The employer is an American employer, so US Social Security and Medicare continue. Mexico is not on the State Department's list of agreements in force, so nothing in US law stops a Mexican social security charge as well; whether one applies is a question of Mexican law.

Analyst split between New York and Spain

An analyst earns $120,000 and works 240 days: 100 in New York and 140 in Spain.

Only the $70,000 can be excluded, and only if she passes the exclusion tests for the period, up to the annual limit prorated for the days in the year she qualifies. The $50,000 is taxed by the US, and New York may claim it too.

Different for you?

• You live in Canada: see working across the border.
• You hold a green card and live in a treaty country: claiming residence there under the treaty's tie-breaker can end your US resident status for tax and, for a long-term resident, trigger the exit tax (26 U.S.C. 7701(b)(6)); see filing while living abroad and exit tax before you do.
• You are neither a US citizen nor a green card holder: US tax on your pay depends on your residency status for the year; get cross-border tax help.
• You are not sure you meet the 330-day or residence test: see foreign earned income exclusion tests.
• You are choosing between the exclusion and the credit: see exclusion or foreign tax credit.
• You are paid as a contractor, not an employee: see self-employment tax abroad.
• Your old state still withholds or claims you: see ending state residency when moving abroad.
• You are the employer deciding how to pay someone abroad: see hiring employees abroad.
• Both countries are charging payroll tax, or your employer was never told: the two-country payroll position needs a review; get cross-border tax help.
• Years have gone unfiled: see the Streamlined Foreign Offshore Procedures and get cross-border tax help.