Expat Employment with Foreign Company Tax Requirements

Working for a foreign employer means no US withholding and full responsibility for reporting and estimated payments. The Foreign Earned Income Exclusion and Social Security Totalization Agreements become critical tax tools.

There is no US withholding on your wages. A foreign employer has no obligation to withhold US federal income tax or report your earnings on a W-2. This means you are responsible for reporting your foreign employment income on your US return and either making quarterly estimated payments or claiming the Foreign Earned Income Exclusion to offset the liability.

The FEIE can exclude up to $126,500 (2024) of foreign earned income. To qualify, you must meet either the bona fide residence test or the physical presence test (330 full days in a foreign country during a 12-month period). The exclusion is claimed on Form 2555 and must be elected -- it is not automatic. Alternatively, if you paid income tax to the foreign country, the Foreign Tax Credit (Form 1116) may produce a better result.

Social Security Totalization Agreements determine which country's system you pay into. If no agreement exists between the US and your country of employment, you may owe self-employment tax to the US on your foreign earnings even though you also paid into the foreign system. If an agreement does exist, you generally pay into only the foreign country's system during employment there.

The pitfall: Many expats working for foreign employers assume they owe no US tax and simply do not file. The filing obligation exists regardless of the FEIE, and failing to file means you cannot claim the exclusion at all.