Publication 54 (2005), Tax Guide for U.S. Citizens and Resident Aliens Abroad

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 Benefits Provided by Section 911 of the Internal Revenue Code
W-4
Employee's Withholding Allowance Certificate
W-9
Request for Taxpayer Identification Number and Certification

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.

Your employer does not have to withhold U.S. income tax from any wages earned abroad that you can reasonably be expected to exclude under either the foreign earned income exclusion or the foreign housing exclusion.

Statement. You can give a statement to your employer indicating that you will meet 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.

Give the statement to your employer and not to the IRS.

Generally, your employer can stop the withholding once you submit a signed 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, your employer must consider any information about pay you received from any other source outside the United States.

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

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.

This image is too large to be displayed in the current screen. Please click the link to view the image.

Form 673

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.

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 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 resident 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 Philadelphia 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 the Form SSA-1042S, Social Security Benefit Statement.
A copy of the “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 of the United States unless one of the following exceptions applies.

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.
You are working in one of the countries with which the United States has entered into a binational social security agreement (discussed later).
You are working for an American employer (defined later).
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 employers.

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 Virgin Islands, Guam, or American Samoa.

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 residents working abroad for foreign affiliates of the 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 and excluded 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.

Australia	Germany	Norway
Austria	Greece	Portugal
Belgium	Ireland	South Korea
Canada	Italy	Spain
Chile	Japan	Sweden
Finland	Luxembourg	Switzerland
France	Netherlands	United Kingdom

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:

U.S. Social Security Administration
Office of International Operations
P.O. Box 17775
Baltimore, MD 21235-7775.

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

http://www.socialsecurity.gov/international

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 compliance from the Office of International Operations.

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 Operations, 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.

2. Withholding Tax