Working Remotely Abroad for a U.S. Company: What Taxes Do You Pay?

As remote work becomes increasingly prevalent, more U.S. employees are choosing to work from abroad. This raises important questions about tax obligations for those working remotely in another country while employed by a U.S.-based company. Understanding these tax implications is crucial to ensure compliance and avoid penalties.

Determining Residency and Tax Obligations

When working remotely abroad for a U.S. company, determining your residency status is key to understanding your tax obligations. The U.S. Internal Revenue Service (IRS) uses the substantial presence test and the green card test to establish whether you are considered a U.S. resident for tax purposes. The substantial presence test requires at least 31 days of physical presence in the U.S. in the current year and 183 days over a three-year period, factoring in all days from the current year, one-third from the previous year, and one-sixth from the year before that.

As a U.S. resident, you are taxed on worldwide income regardless of where it is earned. Non-resident aliens, however, are only taxed on U.S.-sourced income. Other countries may also have their own tax residency criteria, leading to potential dual residency and double taxation, which can be mitigated through tax treaties or foreign tax credits.

Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion (FEIE) allows U.S. citizens and resident aliens working abroad to reduce their taxable income. In 2024, individuals can exclude up to $120,000 of foreign earned income if they meet specific criteria. This exclusion benefits those who spend significant time outside the U.S. and can result in substantial tax savings.

To qualify, you must pass either the bona fide residence test or the physical presence test. The bona fide residence test requires living in a foreign country for an entire tax year with the intent to make it your home. The physical presence test requires 330 full days of physical presence in a foreign country within a 12-month period. Both tests demand thorough documentation to ensure compliance and maximize tax benefits.

The FEIE applies only to income earned from services performed in a foreign country, not passive income like dividends or rental income. Taxpayers can also claim the foreign housing exclusion or deduction for certain housing expenses, further reducing taxable income.

Tax Treaty Considerations

Tax treaties simplify international taxation for U.S. citizens working abroad by preventing double taxation and fostering cross-border economic activity. The U.S. has treaties with over 65 countries, each with unique provisions that can significantly affect your tax obligations.

Many treaties include a “residency tie-breaker” rule to establish primary tax residency when an individual qualifies as a resident under both countries’ laws. These treaties may also provide exemptions or reduced tax rates for specific income types, such as dividends, interest, or royalties.

Navigating tax treaties often requires professional expertise to identify applicable provisions and ensure compliance with both U.S. and foreign tax laws.

State-Level Tax Factors

Federal tax obligations are a primary concern for U.S. citizens working abroad, but state-level taxes add complexity. States vary in their tax policies, with some, like Texas and Florida, imposing no income taxes, while others, such as California and New York, aggressively seek to tax former residents who maintain ties to the state.

Your domicile, or permanent home, determines state tax obligations. Changing your domicile to a tax-favorable state can reduce or eliminate state taxes, but this requires substantial evidence of relocation, such as purchasing property, obtaining a driver’s license, and registering to vote in the new state.

Employer Withholding Guidelines

Working remotely abroad adds complexity to employer withholding requirements. U.S. employers are generally required to withhold federal income taxes, Social Security, and Medicare taxes. However, foreign tax obligations or exclusions like the Foreign Earned Income Exclusion can affect withholding.

Employees qualifying for the FEIE can submit IRS Form 673 to their employer to adjust withholding amounts. Without this form, employers will withhold taxes as if the employee is fully taxable, potentially resulting in overpayment. Social Security and Medicare taxes typically still apply unless the employee works in a country with a Totalization Agreement, which prevents double taxation of Social Security and determines which country’s system applies.

Employers may also face foreign payroll requirements, as some countries mandate tax withholding for employees working within their borders. Employees should coordinate with their employer’s payroll department and seek professional advice to ensure compliance with both U.S. and foreign tax laws.

Reporting Requirements

Remote workers abroad must meet specific reporting obligations to comply with U.S. tax laws. All U.S. citizens and resident aliens are required to file annual tax returns, reporting worldwide income, even if eligible for exclusions or credits.

A key requirement is the Foreign Bank Account Report (FBAR), which mandates reporting foreign accounts exceeding $10,000 at any point during the year. Non-compliance can lead to significant penalties, ranging from $10,000 for non-willful violations to the greater of $100,000 or 50% of the account balance for willful violations.

Additionally, the Foreign Account Tax Compliance Act (FATCA) requires reporting specified foreign financial assets if their total value exceeds set thresholds. For instance, single filers living abroad must report assets exceeding $200,000 on IRS Form 8938. Maintaining detailed records of foreign income, accounts, and assets is essential to ensure accurate reporting and avoid penalties.