Form 673 is an Internal Revenue Service (IRS) tax form to claim an exemption from U.S. income tax withholding a U.S. employee earns on foreign wages abroad.
Form 673 is also called “Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s).”
Americans living and working abroad for a U.S. company may qualify for a tax exemption. Form 673 permits the employer to exclude income tax withholding on employees' wages while working in a different country.
What is Form 673 used for?
All U.S. employers must withhold U.S. income tax from their American employees. However, Americans working abroad must also pay the equivalent of income taxes in the country they live in, even if they are working for and earning income from a U.S. company.
Form 673 ensures that the employee does not pay double income tax from the U.S. in addition to the country they live and work.
Companies often send employees abroad to work as expats as part of their global expansion strategy. A business might relocate employees temporarily to train colleagues in another country where it has established an entity or for a long-term assignment to test a new market for business opportunities.
Additionally, some employers allow talent to relocate or travel abroad for work or personal reasons while maintaining their position with the company.
Form 673 allows these expat employees to work abroad and earn the same wage without paying income tax in multiple countries.
Learn more: How to Handle International Employee Relocation
Who needs to complete Form 673?
U.S. citizens or resident aliens living in a foreign country but working remotely for a U.S. employer complete Form 673 to ask their employer to exclude their wages from U.S. income tax withholding while working in a different country.
To qualify for Form 673, the individual must meet the IRS’s foreign-earned income exclusion criteria:
- The employee is a U.S. citizen or resident alien
- The employee works abroad
- The employee earns foreign income subject to U.S. taxes while living in another country
- The employee meets either the Physical Presence Test or the Bona Fide Residence Test
To meet the Physical Presence Test, the employee must be a U.S. citizen or resident alien who spent at least 330 days outside the U.S. in one year.
To meet the Bona Fide Residence Test, the individual must be a U.S. citizen living as a resident of a foreign country for an uninterrupted full calendar year.
Note that a U.S. employee living and working abroad may still need to file a U.S. tax return even if they qualify for tax withholdings through Form 673. Form 673 does not apply to self-employed individuals.
How to fill out and submit Form 673
The employee must fill out Form 673 and provide it to their employer. The employee completes the following steps on Form 673:
- Basic info. Fill out your legal name and social security number.
- Foreign Earned Income Exclusion. Identify the calendar year you’re claiming an exemption.
- Residency. Indicate which residency status qualifies you for the deduction: the Bona Fide Residence Test or the Physical Presence Test.
- Bona fide residence. This applies to individuals who have been in a foreign country for a consecutive period of 12 months. Indicate the country you’re living in and the date you began residency.
- Physical presence. This applies to individuals living in a foreign country for at least 330 days in a calendar year. Indicate the country you’re living in and the dates you’re abroad.
- Foreign Housing Exclusion. Estimate your expenses while living abroad, such as rent, utilities, and insurance. Consider working with a global tax expert or global immigration partner to help you complete this section and ensure the best deduction possible.
- Certification. Sign, date, verify the information is accurate, and send it to your employer.
Once the employer receives a completed Form 673, they will withhold the correct amount of income tax from the employee’s next paycheck.
Read more: Complete Guide to Payroll Tax
When is Form 673 due?
A U.S. employee should fill out Form 673 for every tax year they spend overseas. The employee should provide a completed Form 673 as soon as they begin working abroad so the employer can withhold the correct income tax in their next paycheck.
Consequences for not filing Form 673
A U.S. employee working abroad does not break any laws if they do not file Form 673. However, without a Form 673, their employer will continue to withhold U.S. taxes from their wages, and they will have to pay double taxes.
Consequences for filing out Form 673 incorrectly
If a U.S. employee fills out Form 673 incorrectly, their employer will continue withholding taxes from their paycheck, and the employee will have to pay double taxes. If an employee submits Form 673 but the employer believes they don’t qualify for the exemption, their tax withholding will not change. If this situation occurs, the employee should seek professional counsel from a global tax expert to investigate the issue.
Sometimes, an ineligible employee may complete the form, but they don’t qualify for the exemption. If their employer stops withholding taxes from their wages, the ineligible employee must pay the required income taxes by the end of the tax year. They may also be liable for additional taxes, interest, and penalties.
Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2024 Velocity Global, LLC. All rights reserved.
