2.   Withholding Tax

Topics - This chapter discusses:

  • Withholding income tax from the pay of U.S. citizens,

  • Withholding tax at a flat rate, and

  • Social security and Medicare taxes.

Useful Items - You may want to see:

Publication

  • 505 Tax Withholding and Estimated Tax

Form (and Instructions)

  • 673 Statement For Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion Provided by Section 911

  • W-4 Employee's Withholding Allowance Certificate

  • W-9 Request for Taxpayer Identification Number and Certification

See chapter 7 for information about getting this publication and these forms.

Income Tax Withholding

U.S. employers generally must withhold U.S. income tax from the pay of U.S. citizens working abroad unless the employer is required by foreign law to withhold foreign income tax.

Foreign earned income exclusion.   Your employer does not have to withhold U.S. income taxes from wages you earn abroad if it is reasonable to believe that you will exclude them from income under the foreign earned income exclusion or the foreign housing exclusion.

  Your employer should withhold taxes from any wages you earn for working in the United States.

Statement.   You can give a statement to your employer indicating that you expect to qualify for the foreign earned income exclusion under either the bona fide residence test or the physical presence test and indicating your estimated housing cost exclusion.

  Form 673 is an acceptable statement. You can use Form 673 only if you are a U.S. citizen. You do not have to use the form. You can prepare your own statement. See a copy of Form 673, later.

  Generally, your employer can stop the withholding once you submit the statement that includes a declaration that the statement is made under penalties of perjury. However, if your employer has reason to believe that you will not qualify for either the foreign earned income or the foreign housing exclusion, your employer must continue to withhold.

  In determining whether your foreign earned income is more than the limit on either the foreign earned income exclusion or the foreign housing exclusion, if your employer has any information about pay you received from any other source outside the United States, your employer must take that information into account.

Foreign tax credit.   If you plan to take a foreign tax credit, you may be eligible for additional withholding allowances on Form W-4. You can take these additional withholding allowances only for foreign tax credits attributable to taxable salary or wage income.

Withholding from pension payments.   U.S. payers of benefits from employer-deferred compensation plans, individual retirement plans, and commercial annuities generally must withhold income tax from payments delivered outside of the United States. You can choose exemption from withholding if you:
  • Provide the payer of the benefits with a residence address in the United States or a U.S. possession, or

  • Certify to the payer that you are not a U.S. citizen or resident alien or someone who left the United States to avoid tax.

Check your withholding.   Before you report U.S. income tax withholding on your tax return, you should carefully review all information documents, such as Form W-2, Wage and Tax Statement, and the Form 1099 information returns. Compare other records, such as final pay records or bank statements, with Form W-2 or Form 1099 to verify the withholding on these forms. Check your U.S. income tax withholding even if you pay someone else to prepare your tax return. You may be assessed penalties and interest if you claim more than your correct amount of withholding allowances.

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Form 673

30% Flat Rate Withholding

Generally, U.S. payers of income other than wages, such as dividends and royalties, are required to withhold tax at a flat 30% (or lower treaty) rate on nonwage income paid to nonresident aliens. If you are a U.S. citizen or resident alien and this tax is withheld in error from payments to you because you have a foreign address, you should notify the payer of the income to stop the withholding. Use Form W-9 to notify the payer.

You can claim the tax withheld in error as a withholding credit on your tax return if the amount is not adjusted by the payer.

Social security benefits paid to residents.   If you are a lawful permanent resident (green card holder) and a flat 30% tax was withheld in error on your social security benefits, the tax is refundable by the Social Security Administration (SSA) or the IRS. The SSA will refund the tax withheld if the refund can be processed during the same calendar year in which the tax was withheld. If the SSA cannot refund the tax withheld, you must file a Form 1040 or 1040A with the Internal Revenue Service Center at the address listed under Where To File to determine if you are entitled to a refund. The following information must be submitted with your Form 1040 or Form 1040A.
  • A copy of Form SSA-1042S, Social Security Benefit Statement.

  • A copy of your “green card.

  • A signed declaration that includes the following statements. 
     
    I am a U.S. lawful permanent resident and my green card has been neither revoked nor administratively or judicially determined to have been abandoned. I am filing a U.S. income tax return for the taxable year as a resident alien reporting all of my worldwide income. I have not claimed benefits for the taxable year under an income tax treaty as a nonresident alien.

Social Security and Medicare Taxes

Social security and Medicare taxes may apply to wages paid to an employee regardless of where the services are performed.

General Information

In general, U.S. social security and Medicare taxes do not apply to wages for services you perform as an employee outside the United States unless one of the following exceptions applies.

  1. You perform the services on or in connection with an American vessel or aircraft (defined later) and either:

    1. You entered into your employment contract within the United States, or

    2. The vessel or aircraft touches at a U.S. port while you are employed on it.

  2. You are working in one of the countries with which the United States has entered into a bilateral social security agreement (discussed later).

  3. You are working for an American employer (defined later).

  4. You are working for a foreign affiliate (defined later) of an American employer under a voluntary agreement entered into between the American employer and the U.S. Treasury Department.

American vessel or aircraft.   An American vessel is any vessel documented or numbered under the laws of the United States and any other vessel whose crew is employed solely by one or more U.S. citizens, residents, or corporations. An American aircraft is an aircraft registered under the laws of the United States.

American employer.   An American employer includes any of the following.
  • The U.S. Government or any of its instrumentalities.

  • An individual who is a resident of the United States.

  • A partnership of which at least two-thirds of the partners are U.S. residents.

  • A trust of which all the trustees are U.S. residents.

  • A corporation organized under the laws of the United States, any U.S. state, or the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, or American Samoa.

  An American employer also includes any foreign person with an employee who is performing services in connection with a contract between the U.S. government (or any instrumentality thereof) and a member of a domestically controlled group of entities which includes such foreign person.

Foreign affiliate.   A foreign affiliate of an American employer is any foreign entity in which the American employer has at least a 10% interest, directly or through one or more entities. For a corporation, the 10% interest must be in its voting stock. For any other entity, the 10% interest must be in its profits.

  Form 2032, Contract Coverage Under Title II of the Social Security Act, is used by American employers to extend social security coverage to U.S. citizens and resident aliens working abroad for foreign affiliates of American employers. Once you enter into an agreement, coverage cannot be terminated.

Excludable meals and lodging.   Social security tax does not apply to the value of meals and lodging provided to you for the convenience of your employer if it is reasonable to believe that you will be able to exclude the value from your income.

Bilateral Social Security (Totalization) Agreements

The United States has entered into agreements with some foreign countries to coordinate social security coverage and taxation of workers who are employed in those countries. These agreements are commonly referred to as totalization agreements and are in effect with the following countries.

Australia Germany Poland
Austria Greece Portugal
Belgium Ireland Slovak
Canada Italy Republic
Chile Japan Spain
Czech Korea, South Sweden
Republic Luxembourg Switzerland
Denmark Netherlands United
Finland Norway Kingdom
France    
     

Under these agreements, dual coverage and dual contributions (taxes) for the same work are eliminated. The agreements generally make sure that you pay social security taxes to only one country.

Generally, under these agreements, you will only be subject to social security taxes in the country where you are working. However, if you are temporarily sent to work in a foreign country and your pay would otherwise be subject to social security taxes in both the United States and that country, you generally can remain covered only by U.S. social security. You can get more information on any specific agreement by contacting:

Social Security Administration 
Office of International Programs 
P.O. Box 17741 
Baltimore, MD 21235-7741

If you have access to the Internet, you can get more information at:

Covered by U.S. only.   If your pay in a foreign country is subject only to U.S. social security tax and is exempt from foreign social security tax, your employer should get a certificate of coverage from the Office of International Programs.

Covered by foreign country only.   If you are permanently working in a foreign country with which the United States has a social security agreement and, under the agreement, your pay is exempt from U.S. social security tax, you or your employer should get a statement from the authorized official or agency of the foreign country verifying that your pay is subject to social security coverage in that country.

  If the authorities of the foreign country will not issue such a statement, either you or your employer should get a statement from the U.S. Social Security Administration, Office of International Programs, at the address listed earlier. The statement should indicate that your wages are not covered by the U.S. social security system.

  This statement should be kept by your employer because it establishes that your pay is exempt from U.S. social security tax.

  Only wages paid on or after the effective date of the totalization agreement can be exempt from U.S. social security tax.


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