February 12, 2015
IRS Form 673’s official title is “Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) provided by Section 911.” What a name? Why should you, an expat, worry about this form?
- Overseas US Employees: If you anticipate being able to claim the overseas earned income and housing exclusions, you are required to complete IRS Form 673 when hired and each subsequent year. Your employer should keep the completed IRS Form 673 in your personnel file(s). The purpose of this form is to certify to your employer that you expect to meet the overseas earned income exclusion and housing exclusion and to give your employer the authority to stop withholding any federal and state income taxes from your payroll check. Your employer is required to withhold social security and Medicare taxes, as these taxes are required to be withheld no matter where a salary is earned by a US citizen (or green card holder) working overseas for a US organization.
- Overseas US Consultants: This form is not required to be completed by overseas consultants, since federal and state payroll taxes are not withheld from consultants’ pay. Overseas consultants are responsible for paying these taxes through federal and state estimated tax vouchers, due quarterly each year.
Don’t underestimate the federal tax amount! If your employer withholds too much federal tax, it’s not a big deal, as you will receive a refund when you file your 1040. However if you underestimate your federal tax, you will pay the deficient tax amount and the penalties. In this case one can say it’s better to overestimate. Think carefully before completing the form.