(UNITED STATES) — U.S. employees working abroad can use Form 673 to ask their U.S. employer to reduce federal income tax withholding on wages they expect to exclude under the Foreign Earned Income Exclusion and, in some cases, the foreign housing exclusion.

The form goes to the employer, not the IRS, and it works as a payroll withholding tool during the year rather than a claim on the annual tax return.

That distinction affects cash flow. Without Form 673, an employer may keep withholding federal income tax from wages even when the employee expects those wages to qualify for exclusion later, forcing the worker to wait until tax filing season for a refund.

IRS rules allow an employer to stop withholding U.S. income tax from the portion of wages earned abroad that matches the expected exclusion amounts if the employer has good reason to believe the employee will qualify.

Employees can give the employer a statement showing they expect to meet either the bona fide residence test or the physical presence test, along with any expected housing cost exclusion.

Key Exemption Amount for 2026

The amount at stake rose again for the current tax year. For tax year 2026, the maximum Foreign Earned Income Exclusion is $132,900 per qualifying person, and married individuals who both work abroad and each meet the requirements may choose the exclusion separately.

Who Can Use Form 673

Form 673 mainly applies to employees who stay on a U.S. payroll while performing services outside the United States. That group can include U.S. citizens assigned to a foreign office, employees transferred to India, UAE, UK, Singapore, Canada or Europe, workers on long overseas assignments, and remote employees whose work takes place abroad even though their pay still runs through a U.S. company.

Green card holders and resident aliens can also fall within the rules if they live and work abroad and otherwise qualify. IRS Publication 54 says U.S. citizens and resident aliens living and working abroad remain taxed on worldwide income, though they may exclude part of their foreign earnings and may also exclude or deduct certain foreign housing amounts.

Form 673 vs. Form 2555

The form does not replace Form 2555, which remains the document used to actually claim the Foreign Earned Income Exclusion and foreign housing exclusion or deduction on the federal tax return.

Form 673 helps payroll decide whether to reduce withholding during the year; Form 2555 decides the claim on the filed return.

That separation carries risk. An employee who gives Form 673 to payroll but later fails to qualify for the exclusion can still owe tax at filing time, and penalties or interest can come into play if withholding or estimated payments fall short.

Eligibility Tests for the Exclusion

Eligibility for the exclusion turns on several tests. A taxpayer generally must have foreign earned income, a tax home in a foreign country, and must meet either the physical presence test or the bona fide residence test.

The physical presence test is the easier one to count. It generally requires the taxpayer to be physically present in a foreign country or countries for at least 330 full days during a 12-month period.

The bona fide residence test depends more heavily on facts and circumstances. It generally looks at whether the taxpayer is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.

Timing matters for workers early in an overseas assignment. A person may expect to qualify and file Form 673 at the start of the year, then lose eligibility because of unexpected U.S. travel, an assignment cancellation, illness, a family emergency or an employer recall.

Where Work Is Performed Matters

The wages covered by Form 673 depend on where the services are performed. IRS guidance treats salary as earned abroad when the work takes place outside the United States, even if a U.S. employer pays the wages or deposits them into a U.S. bank account.

That rule reaches many remote employees. A worker may remain on U.S. payroll and still have foreign earned income if the services are actually performed in a foreign country during the qualifying period.

Work performed inside the United States falls outside that treatment. Employees who split the year between foreign and U.S. workdays may need an allocation for payroll and tax purposes, because wages tied to services performed in the United States are not foreign earned income.

Housing Exclusion Considerations

The same withholding relief can also extend to housing. Form 673 can account for the foreign housing exclusion, which can matter most in high-rent locations where an employer pays a housing allowance or reimburses rent.

Publication 54 says the foreign housing exclusion applies to the part of the housing amount paid with employer-provided amounts, subject to foreign earned income and other limits. It also says the housing exclusion must be figured before the Foreign Earned Income Exclusion.

That ordering can change the withholding calculation. Employees who expect both exclusions should factor both into discussions with payroll rather than focus only on the $132,900 FEIE cap.

What Form 673 Does Not Cover

The form has clear limits. It does not cancel the duty to file a U.S. tax return, and it does not apply to investment income, rental income, dividends, interest, capital gains, pension income or Indian mutual fund income.

It also does not solve other international reporting issues. FBAR, FATCA, Form 8938 and PFIC rules still require separate review for U.S. expats with foreign bank accounts, Indian mutual funds, UAE accounts, Canadian accounts, UK pensions or other foreign assets.

Self-employed taxpayers do not get the same benefit through Form 673. The form is aimed at employees, and the Foreign Earned Income Exclusion does not automatically remove self-employment tax exposure, which requires a separate review of self-employment tax and totalization issues.

Practical Example: Dubai Assignment

A practical example shows how the withholding shift works. A U.S. citizen employed by a U.S. technology company and assigned to Dubai from January 2026 through December 2026 expects to earn $150,000 in salary while working abroad and expects to meet the physical presence test.

If that employee submits no Form 673, the employer may continue withholding U.S. federal income tax on the full salary during the year. When the employee files the 2026 return, Form 2555 may exclude up to $132,900 of qualifying foreign earned income, subject to the rules and limits, and the worker may then receive a refund.

If the same employee gives Form 673 to payroll and the employer has good reason to believe the worker will qualify, payroll withholding can fall during the year on the portion expected to be covered by the Foreign Earned Income Exclusion and foreign housing exclusion. Monthly cash flow improves because less tax comes out upfront.

The risk appears if the assignment ends early. A failed physical presence test can turn reduced withholding into a balance due on the tax return, which is why workers and employers need to monitor the facts during the year rather than treat the form as a one-time election.

Common Payroll Errors and Risks

Payroll errors often start with overreach. Employees should not hand in Form 673 merely because they spent a few months abroad, since short assignments may not satisfy either the physical presence test or the bona fide residence test.

Employers also cannot treat the form as a blanket exemption for every type of compensation. Bonuses, stock compensation, wages tied to U.S. workdays and nonqualified deferred compensation can require separate sourcing and payroll review.

Changes during the year can force payroll withholding to restart. Early returns to the United States, country changes, loss of foreign tax home status, or failure to hit the day-count requirement can all alter whether the original Form 673 estimate remains valid.

Tax Planning Tradeoffs

Tax planning can also cut against using the form. Publication 54 says that once a taxpayer chooses the Foreign Earned Income Exclusion or foreign housing exclusion, the taxpayer cannot take a foreign tax credit or deduction for foreign taxes on the income excluded.

That tradeoff matters in high-tax countries such as the UK, Canada, Germany or Australia. In some cases, the foreign tax credit produces a better result than the exclusion, which means a worker should compare the expected tax outcome before reducing payroll withholding through Form 673.

Recordkeeping Requirements

Recordkeeping becomes especially important once withholding changes. Employees using the form should keep the copy sent to payroll, employer acknowledgement, assignment letter, foreign work location records, travel calendar, passport entry-exit records, local residence proof, lease documents, housing allowance details, payroll statements, foreign tax documents and year-end Form W-2.

Digital nomads and remote employees need especially careful travel records because the physical presence test depends on full days spent in foreign countries. Time back in the United States can affect the result directly.

Form 673 leaves one central rule untouched: the employee still has to prove eligibility when filing the return. The form changes withholding, not the legal standard for the exclusion.

Used carefully, it lets qualifying employees avoid over-withholding and the long wait for a refund. Used casually, it can produce tax due at filing time after a year of reduced payroll withholding.