Americans working overseas for an US company may qualify to use Form 673 to claim a tax exemption.
US citizens working for a US company but living in a foreign country abroad fill out Form 673 each year to ask their employer to exclude all or part of their wages from US income tax withholding while they’re working in a different country. That’s because, by default, all US employers must withhold US income tax from any US citizen they employ.
Once completed, your US employer will withhold less (or no) money out of your paycheck for US income taxes.
What is IRS Form 673?
IRS Form 673 is the “Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911.”
This form exists because the US requires all its citizens to pay income tax to the Internal Revenue Service (IRS), even if you earn the income while living abroad. That means American employers are required to withhold taxes from any American on their payroll. Unfortunately, Americans working abroad also have to pay the equivalent of income and social security taxes wherever they live—if you live in Canada for example, you also file a tax return with the Canada Revenue Agency. If you don’t take advantage of these exemptions, you pay double income tax—sometimes called expat tax.
To ensure you aren’t hit with twice the taxes from the US and the country you’re living in, you can fill out Form 673 to become exempt from US withholding tax from an American employer.
If you’re a US citizen or resident alien living abroad and working remotely for a US employer, you might qualify for US income tax exemptions.
Do I qualify for Form 673?
To be able to use Form 673, a US expat needs to meet the criteria for the IRS’s foreign earned income exclusion (FEIE) or foreign housing exclusion:
They have foreign earned income or make money while living in a foreign country
Their tax home is in a foreign country
They are a US citizen living as a bona fide resident of another country for an entire year OR a US resident alien with citizenship in a foreign country that the US has a tax treaty with and has lived there for an entire year OR a US citizen or resident alien who spent at least 330 days outside the US in one year
How does Form 673 work?
Form 673 is completed by a worker and provided to their employer. If you’re self-employed, this form isn’t relevant.
On Form 673, you’ll choose whether to go by the “Bona Fide Residence Test” or the “Physical Presence Test.”
Once completed, you give the form to your employer. The employer keeps it on file and makes the necessary payroll changes to stop withholding tax.
If your situation changes and you return to the US (or fail to meet the qualifications for foreign income exclusion, usually because you have spent too many days in the US), fill out a Form W-4 to resume tax withholding.
How do I fill out and submit Form 673?
Follow along with the form (PDF)
Enter your legal first name and middle initial, legal surname, and social security number.
Part 1: Foreign Earned Income Exclusion
Form 673 Part I identifies the year you’re claiming an exemption for. You’ll write in the calendar year if you’ve been in a foreign country for a single year from January 1-December 31, or you’ll use the other lines if you want to use the exclusion for multiple tax years (e.g., you worked in a foreign country from August 2020 to September 2021, and you want to claim an exemption for both 2020 and 2021).
After identifying the year, you’ll indicate which residency status qualifies you for the deduction: the Bona Fide Residence Test or the Physical Presence Test.
Bona fide residence
The bona fide residence test is for people who have been in a foreign country for a consecutive period of twelve months. Bona fide residents indicate the country they’re living in and the date they began their residency. If the resident decides to stay in the foreign country beyond the end of the tax year, they can indicate the day they anticipate returning to the US.
People who have been living in a foreign country for at least 330 days in a year will use the physical presence test. Indicate the country you’re living in as well as the year or part of the year you’re abroad.
Part II: Foreign Housing Exclusion
In Part II of Form 673, estimate your expenses while living abroad (e.g., rent, utilities, insurance, etc.). You may want to hire someone well-versed in international taxes to help you complete Part II to ensure you get the best deduction possible.
Part III of Form 673 has you certify that you filled out the form accurately. You’ll sign and date the form, then send it to your employer.
What comes next
Once your employer receives your completed form, they’ll withhold the correct amount of federal income tax from your pay. Unless the IRS determines you don’t qualify for the exclusions, you’ll see a bump in your next paycheck (and your bank account).
How often do I fill out Form 673?
You’ll need to fill out Form 673 for every tax year you spend overseas.
Other forms and responsibilities for US expats
US Federal Tax return: even if you weren’t physically in the US that year, you still need to fill out a Federal Tax Return as a citizen or resident alien. Forgetting to file a federal tax return can get you into significant tax trouble.
US State tax return: If the state your company operates from requires employees to complete a state income tax return, then you’ll also have to complete a state return even if you never set foot in that state. For example, if your employer is based out of California, you’ll still need to submit a California state return even if you were working in Iceland.
Form 2555: This form is used to determine your FEIE and gets sent to the IRS. If you’re filing Form 673, you will also complete Form 2555 to record your tax exemption with the IRS. The form will help you calculate your exact foreign housing exclusion or foreign housing deduction, which exempt taxes on expat housing expenses. Qualified taxpayers can receive an exclusion on up to $112,000 worth of income in 2022. Attach Form 2555 to your taxpayer's Form 1040 or 1040-SR to receive the exclusion or deduction.
FATCA Form 8938: This form is a statement of your specified foreign assets and should be completed if the total value of all your interest in specified foreign financial assets is greater than the appropriate reporting threshold.
Form 1116: This form is a statement claiming your foreign tax credit and should be completed if you are an individual, estate, or trust that paid or accrued foreign taxes to a foreign country or US possession.
FinCEN Form 114 or FBAR: This form must be completed by US citizens who have foreign financial accounts that exceed $10,000 USD in value at any point in the calendar year.
Tax return in your country of residence: You’ll still need to be compliant with the tax laws of the country you’re residing in, so you’ll have to complete a tax return to report the income you receive while living abroad.
Further reading: 4 Ways to Reduce Taxes on Foreign Income for US Citizens Living Abroad
Penalties for not filing Form 673
You don’t break any laws if you don’t file a Form 673. If you work abroad and you don’t file Form 673, then your employer will continue to withhold US taxes from your paycheck. The most significant consequence of not submitting the form is getting hit with double taxes.
Consequences for filing Form 673 incorrectly
If you don’t complete Form 673 correctly, your employer will continue to withhold part of your pay for taxes. If you’ve submitted the form and your tax withholding doesn’t change, it’s possible that your employer had reason to believe that you didn’t qualify for the exemption. You can call your employer or have your CPA or accountant reach out to them on your behalf to see what the issue is.
If you filed the form and you weren’t eligible (for example, you didn’t stay abroad for over 330 days or you weren’t out of the country for a consecutive year), then you will have to pay the full amount of Federal and State income taxes required at the end of the tax year. If your employer stopped withholding tax funds from your paycheck, you’ll have to pay the difference back to the IRS. If at any point you realize that you won’t qualify for FEIE for a given year, it’s best to have your employer reinitiate your tax withholdings by providing them with a new W-4 form.
The easy way to Deel with all of your foreign tax forms
Filling out one tax return is hard enough, and things can quickly get messy once you start throwing in all of the extra forms you need to complete when you work abroad. You should be able to work remotely wherever you want without having to worry about all of the paperwork.
Deel helps employers hire and pay employees and independent contractors around the world, including dealing with all the complicated taxes and compliance requirements.
We take care of the legal and compliance needs so you and your team can enjoy working wherever your job, family, or wanderlust take you. See what Deel can do for you and request your free demo today.
Disclaimer: This post is provided for informational purposes and should not be considered legal or tax advice. Consult a certified tax preparer for more info.