Form 673 is an IRS statement a U.S. citizen can give an employer to request reduced or zero federal income tax withholding on wages earned while working abroad. It applies only to wages the employer reasonably believes may qualify for the foreign earned income exclusion or the foreign housing exclusion under Section 911 of the Internal Revenue Code. The employee estimates eligibility and certifies the statement under penalties of perjury. The employer uses that information to decide whether to adjust withholding on qualifying wages, but the form is not filed with the IRS. Form 673 does not establish that the employee ultimately qualifies for an exclusion, claim the exclusion on a tax return, or remove other payroll taxes. The employee must determine actual eligibility and report income correctly when filing a federal return.
Table of Contents
- Who Can Use Form 673?
- What Information Goes on Form 673?
- How Does Form 673 Change Payroll Withholding?
- What If Eligibility or Plans Change?
- How Is Form 673 Different from Form W-4 and Form 2555?
Who Can Use Form 673?
Form 673 is for U.S. citizens who expect to meet the requirements for an exclusion on income earned from work abroad. The IRS says a resident alien may qualify for the exclusion on a tax return in some circumstances but cannot use Form 673 to request this withholding adjustment. Eligibility for the tax benefit and eligibility to use this particular payroll statement are separate questions.
Generally, claiming the foreign earned income exclusion requires a foreign tax home and qualification under either the bona fide residence test or the physical presence test. The physical presence test generally involves at least 330 full days in foreign countries during a period of 12 consecutive months. The bona fide residence test looks at whether a person is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. These are distinct tests. A brief overseas assignment alone does not show that either test is met. The IRS explains the requirements in its Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Where the work is performed matters when determining whether compensation is foreign earned. Pay deposited into a U.S. bank account can still be for services performed abroad. Conversely, wages for workdays in the United States generally do not qualify as foreign earned income for this purpose. U.S. government employee income is also generally not eligible for the exclusions. Employees with mixed work locations or unusual employment arrangements may need individualized tax advice before estimating an exclusion.
What Information Goes on Form 673?
The form asks for identifying details and information about the tax year and anticipated qualification. The employee indicates which qualification test they expect to meet and supplies details about the qualifying period. These estimates should reflect the employee’s expected residence or travel and work schedule. Changing plans can affect whether the original estimate remains reasonable.
Form 673 also provides for an estimated housing cost exclusion when relevant. The foreign housing exclusion is calculated under separate rules. Not every housing expense qualifies and location-specific limits can apply. The form’s estimate is therefore not simply the employee’s full rent or housing bill. Use the instructions for the relevant tax year and keep records that support the expected costs and dates.
The employee signs the certification and gives the statement to the employer, not to the IRS. The IRS says Form 673 is an acceptable statement, though a taxpayer may provide a comparable statement instead. The form does not replace Form W-4, which is used for ordinary federal income tax withholding, or the employer’s other payroll records. Keep a copy of the completed statement and supporting information in case estimates need to be revisited.
How Does Form 673 Change Payroll Withholding?
An employer may reduce or stop federal income tax withholding on the portion of foreign wages it reasonably believes will qualify for the Section 911 exclusions. The adjustment is limited to potentially excludable wages. It does not automatically apply to all compensation an employee receives. The employer must continue withholding if it has reason to believe the employee will not qualify. The IRS describes the form as a statement employers can use when considering this withholding treatment.
For an employee working both abroad and in the United States, payroll may need to distinguish wages associated with foreign work from wages for U.S. work. The payment location does not by itself determine where the services were performed. Information about compensation from another source may also matter when the employer considers applicable exclusion limits. Employees should give payroll accurate information about their work period and promptly communicate material changes.
The adjustment concerns federal income tax withholding. It does not itself eliminate Social Security or Medicare taxes, state tax obligations, or other authorized payroll deductions. It may increase current take-home pay because less federal income tax is withheld, but it does not reduce the employee’s final tax bill unless the employee qualifies for the exclusion when filing. Payroll teams supporting an international contingent workforce may need to track work location and assignment changes so withholding treatment reflects the employee’s circumstances. This is a payroll administration issue, not a determination of the worker’s final tax eligibility.
What If Eligibility or Plans Change?
The estimate on Form 673 can become inaccurate if an employee returns to the United States earlier than planned or otherwise no longer expects to meet a qualifying test. The form instructs the employee to notify the employer promptly if they become disqualified. The employee should also identify any part of the period for which eligibility is still expected. Payroll can then review whether withholding should resume or change.
For example, an employee may initially expect to satisfy the physical presence test based on a planned overseas schedule. If the employee’s travel changes substantially, the number of qualifying days may fall short. The employee should not assume the original statement continues to support reduced withholding after the relevant facts change. A tax professional can help determine what adjustment is appropriate, particularly if the employee has already received pay with reduced withholding.
Reduced withholding can mean that more tax is due when the return is filed if the employee’s final exclusion is smaller than anticipated. A balance due or estimated tax penalty is not automatic. The result depends on the person’s full tax situation and applicable payment rules. An employee who is uncertain about qualification may prefer to retain ordinary withholding while confirming eligibility. The practical tradeoff is current cash flow versus the possibility of needing to pay tax later.
How Is Form 673 Different from Form W-4 and Form 2555?
Form 673 addresses a narrow payroll question: whether federal income tax withholding may be reduced on wages expected to qualify for Section 911 exclusions. It is not a general declaration that an employee is exempt from federal income tax withholding. For ordinary withholding elections, an employee uses Form W-4. If the employee expects to use a foreign tax credit rather than exclude income, different withholding guidance may apply.
Form 2555 is used to figure and claim the foreign earned income exclusion and any applicable housing exclusion or deduction on the federal income tax return. Form 673 does not claim those benefits. The IRS determines eligibility for the return based on the actual facts and applicable rules, not solely on what the employee estimated for payroll.
At year end, employees should review their year-end tax forms and compare reported wages and withholding with pay records. The amount withheld through payroll is part of the tax accounting for the year, but it does not settle whether the exclusion can be claimed. Form 673 changes the timing and amount of federal income tax collected during the year. The tax return establishes the final treatment of income and determines whether more tax is due or a refund is owed.
