| Publication 54 |
2008 Tax Year |
Topics - This chapter discusses:
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Withholding income tax from the pay of U.S. citizens,
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Withholding tax at a flat rate, and
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Social security and Medicare taxes.
Useful Items - You may want to see:
Form (and Instructions)
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673
Statement For Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion Provided by Section
911
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W-4
Employee's Withholding Allowance Certificate
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W-9
Request for Taxpayer Identification Number and Certification
See chapter 7 for information about getting this publication and these forms.
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 the next page for a copy of Form 673.
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:
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Provide the payer of the benefits with a residence address in the United States or a U.S. possession, or
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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.
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. SSA will refund the tax withheld
if the refund can be processed during the same calendar year in which the tax was withheld. If SSA cannot refund the tax withheld,
you must file a Form 1040 or 1040A with the Internal Revenue Service Center in Austin to determine if you are entitled to
a refund. The following information must be submitted with your Form 1040 or Form 1040A.
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A copy of Form SSA-1042S, Social Security Benefit Statement.
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A copy of your “green card.”
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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.
In general, U.S. social security and Medicare taxes do not apply to wages for services you perform as an employee outside
of the United States unless one of the following exceptions applies.
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You perform the services on or in connection with an American vessel or aircraft (defined later) and either:
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You entered into your employment contract within the United States, or
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The vessel or aircraft touches at a U.S. port while you are employed on it.
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You are working in one of the countries with which the United States has entered into a binational social security agreement
(discussed later).
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You are working for an American employer (defined later).
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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.
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The U.S. Government or any of its instrumentalities.
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An individual who is a resident of the United States.
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A partnership of which at least two-thirds of the partners are U.S. residents.
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A trust of which all the trustees are U.S. residents.
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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.
As of August 1, 2008, 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.
Binational Social Security (Totalization) Agreements
The United States has entered into agreements with several 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.
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 above address. 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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