Payroll Taxes for Employees Working Abroad

Special withholding rules apply if an employee works in other countries. The first consideration is the duration: If an employee works abroad for only part of the year, in general normal withholdings must be made, with the employer matching Social Security and Medicare taxes in the normal percentages. However, an employer is not required to withhold Social Security or Medicare taxes if its employees work in any of the following countries:

• Austria

• Belgium

• Canada

• Finland

• France

• Germany

• Greece

• Ireland

• Italy

• Korea

• Luxembourg

• The Netherlands

• Norway

• Portugal

• Spain

• Sweden

• Switzerland

• United Kingdom

These countries all have totalization agreements with the United States, whereby an employee only has to pay Social Security taxes to the country in which he or she is working. This makes a person exempt from U.S. Social Security and Medicare taxes while working in the listed countries.

If another country requires the withholding of income taxes for income earned while working there, then a company does not have to also withhold U.S. taxes, since this would be regarded as double taxation.

If an employee qualifies for the foreign earned income exclusion, he or she can exclude the first $80,000 of foreign earned income from his or her gross income, but only if that employee's home during the tax year is considered to be abroad, or he or she is physically present in the foreign country for 330 full days out of a 12-month period (which does not have to correspond to a calendar year). The exclusion must be formally elected by filling out either Form 2555 or Form 2555-EZ.