Tax Withholding & Estimated Tax

Generally, you must pay U.S. tax on the income earned abroad in the same way you pay the tax on income earned in the United States. If you are an employee, your employer probably withholds income tax from your pay. If income tax is not withheld or if not enough tax is withheld, you might have to pay estimated tax.

Withholding tax. You may be able to have your employer discontinue withholding income tax from all or a part of your wages. You can do this if you expect to qualify for the income exclusions under either the bona fide residence test or the physical presence test. See Publication 54 for information.

Withholding from pension payments. U.S. payers of benefits from employer deferred compensation plans (such as employer pension, annuity, or profit-sharing plans), individual retirement plans, and commercial annuities generally must withhold income tax from the payments or distributions. Withholding will apply unless you choose exemption from withholding. You cannot choose exemption unless you provide the payer of the benefits with a residence address in the United States or a U.S. possession or unless you 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.

For rules that apply to nonperiodic distributions from qualified employer plans and tax-sheltered annuity plans, get Publication 575, Pension and Annuity Income.

Estimated tax. If you are working abroad for a foreign employer, you may have to pay estimated tax, since not all foreign employers withhold U.S. tax from your wages.

Your estimated tax is the total of your estimated income tax and self-employment tax for the year minus your expected withholding for the year.

When you estimate your gross income, do not include the income that you expect to exclude. You can subtract from income your estimated housing deduction in figuring your estimated tax liability. However, if the actual exclusion or deduction is less than you expected, you may be subject to a penalty on the underpayment.

Use Form 1040-ES, Estimated Tax for Individuals, to estimate your tax. The requirements for filing and paying estimated tax are generally the same as those you would follow if you were in the United States.

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