Federal Income Tax Withholding for Persons Employed Abroad by a U.S. Person
The term "U.S. person" means:
- A citizen or resident of the United States,
- A partnership created or organized in the United States or under the law of the United States or of any State,
- A corporation created or organized in the United States or under the law of the United States or of any State, or
- Any estate or trust other than a foreign estate or foreign trust.
See Internal Revenue Code section (IRC) 7701(a)(31) for the definition of a foreign estate and a foreign trust.
U.S Citizens and Resident Aliens Federal Income Tax Withholding
In general, wages paid to a U.S. citizen or resident by a U.S. person for services performed outside of the United States are subject to U.S. federal income tax withholding except for:
- Certain combat zone compensation of members of the Armed Forces of the United States;
- Certain compensation for agricultural labor (see IRS Publication 51, Circular A, Agricultural Employer's Tax Guide);
- Compensation for domestic service in a private home (unless both the employer and the employee agree to withholding);
- Compensation (in the amount of less than $50) for service not in the course of the employer's trade or business performed in any calendar quarter by an employee;
- Compensation for services for an employer (other than the United States or any agency thereof) if it is reasonable to believe that such remuneration will be excluded from gross income under IRC 911 (Refer to International Taxpayer - Foreign Earned Income Exclusion or IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad). To claim this exemption from withholding, a U.S. citizen employee should give his employer Form 673 Statement For Claiming Benefits Provided by Section 911 of the Internal Revenue Code.
Important Note! A resident alien may not use Form 673 to exempt his wages from withholding of U.S. federal income taxes even though he anticipates that he may qualify to claim the Foreign Earned Income Exclusion on his U.S. federal individual income tax return.
- Compensation for services for an employer (other than the United States or any agency thereof) if the employer is required by the law of any foreign country or possession of the United States to withhold income tax upon such remuneration;
- Compensation for services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order;
- Compensation for services not in the course of the employer's trade or business, to the extent paid in any medium other than cash;
- Compensation paid to or on behalf of an employee if (and to the extent that) at the time of the payment it is reasonable to believe that a corresponding deduction is allowable under IRC 217 for moving expenses (Refer to IRS Publication 521, Moving Expenses);
- Payment for any medical care reimbursement made to or for the benefit of an employee under a self-insured medical reimbursement plan (within the meaning of IRC 105(h)(6));
- Any payment made to or for the benefit of an employee if at the time of such payment it is reasonable to believe that the employee will be able to exclude such payment from income under IRC 106 (Contributions by Employer to Accident and Health Plans);
- Compensation paid by an affiliate of an American employer if at the time of payment:
- It is reasonable to believe that the employee is entitled to an exclusion from income under IRC 911 (Refer to International Taxpayer - Foreign Earned Income Exclusion), or
- The employer is required by the law of the foreign country to withhold income tax on such payment.
As a general rule, wages earned by nonresident aliens for services performed outside of the United States for any employer are foreign source income and therefore are not subject to reporting and withholding of U.S. federal income tax.
Internal Revenue Code Sections 3401, 3402, and 3403
Income Tax Regulations 31.3401(a)-1 et seq; 31.3402(a)-1 et seq; and 31.3403-1.
Internal Revenue Code Section 7701(a)(30) for the definition of a U.S. Person
Revenue Ruling 75-485 on the U.S. and Foreign Payment of a U.S. Citizen-Employee Abroad
Revenue Ruling 92-106 on Withholding / Reporting on Wages for Services Performed Within and Outside the United States
Notice 2001-4, Section V(E) on Foreign Source Services Income
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.