Working abroad for a US company (2025–2026 tax guide)

A US citizen working remotely abroad for a US company remains subject to US federal income tax on worldwide income under IRC Section 61, regardless of where the work is performed.

A non-US citizen who performs all services outside the United States owes no US income tax on that compensation. Two sets of rules apply, and the routing section below directs each reader to the relevant one.

This guide covers both branches. If you are a US citizen or Green Card holder, go straight to the US citizen rules below. If you are a foreign national working for a US company from outside the United States, jump to the non-US citizen section. US employers managing either situation will find the compliance checklist further down.

Working abroad for a US company: Key facts (2025–2026)

• FEIE exclusion limit: $130,000 for tax year 2025 and $132,900 for tax year 2026 (Form 2555).

• Foreign Tax Credit: dollar-for-dollar offset for foreign income taxes paid (Form 1116); unused credits carry forward 10 years.
• Self-employment tax: 15.3% on net earnings. The FEIE does not eliminate SE tax for independent contractors.
• FICA: US employers generally continue withholding Social Security and Medicare from wages paid to employees abroad unless a totalization agreement (30 in force as of 2026; verify the current list at ssa.gov) covers the host country and a certificate of coverage has been issued by the US SSA or the foreign social security agency. Form 673 is for income-tax withholding on qualifying foreign earned income, not FICA.
• Permanent establishment risk: a US company employee working abroad can create a taxable corporate presence for the US employer in the host country.
• State taxes: California, New York, New Mexico, South Carolina, and Virginia continue taxing former residents who have not severed domicile before departing. State residency and domicile rules change; verify your former state's current rules before relying on this list.
• Non-US citizens: workers performing all services outside the US generally owe no US income tax on that compensation. Form W-8BEN is used for foreign-status documentation on certain payments, but it is not the standard payroll form for employee wages.
• Key forms: 1040, 2555, 1116, FinCEN 114 (FBAR), 8938, Form 673, W-8BEN.

US citizen or non-US citizen? Start here

Citizenship determines which set of rules applies; the table below points you to the right one.

Do US citizens still owe US tax when working abroad?

US citizens and Green Card holders who work remotely abroad for a US company owe US federal income tax on all wages earned, regardless of country of employment or employer location.

Under IRC Section 61, gross income includes income from whatever source derived, which the IRS interprets to include wages earned by a US person anywhere in the world. The full framework is laid out in IRS Publication 54.

Two mechanisms reduce or eliminate double taxation: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion lets qualifying US citizens exclude up to $130,000 of foreign earned wages from US federal income tax for tax year 2025 (filed in 2026) and $132,900 for tax year 2026.

The exclusion is claimed on Form 2555, filed with your 1040.

You qualify by meeting either the physical presence test or the bona fide residence test, not both.

 

The following three FEIE limitations are the ones expats most often misread:

• The exclusion applies to income tax only. SE tax (15.3%) is still owed in full by independent contractors, even when the exclusion zeroes out income tax.
• Excluded income does not count as earned income for IRA contribution purposes. If your only earned income is excluded under FEIE, you generally cannot fund a Traditional or Roth IRA that year.
• The FEIE election is binding for future years. If you revoke it, you cannot re-elect it for five tax years without IRS consent.

Proration rules, what counts as foreign earned income, and how the housing exclusion stacks are covered in our deep dive on the FEIE and the $130,000 limit.

The two qualifying tests have their own mechanics: see our guides to the 330-day rule under the physical presence test and the full-year standard for the bona fide residence test.

Foreign Tax Credit (FTC)

The Foreign Tax Credit reduces your US tax liability dollar-for-dollar by the amount of income tax paid to a foreign government.

It is claimed on Form 1116, and unused credits carry forward up to 10 years and back one year.

Three points expats most often miss on the FTC:

• The credit is applied per income basket (general, passive, and others). Credits in one basket cannot offset US tax in another.
• The FTC and FEIE cannot be applied to the same dollar of income. You can use both in the same return, but only on different incomes.
• The FTC is generally preferable in high-tax countries (Germany, France, the UK), where the foreign income tax rate meets or exceeds the US rate.

For a line-by-line walk-through, see our Form 1116 step-by-step guide.

FEIE or Foreign Tax Credit: which one to use?

For US employees in low-tax countries (UAE, Bahrain, Cayman Islands), the FEIE eliminates US federal income tax on the excluded portion entirely. For US employees in high-tax countries (Germany, UK, France), the Foreign Tax Credit is generally preferable because it offsets dollar-for-dollar against taxes already paid to the foreign government.

 

Three TFX client scenarios that show how this plays out:

1. A US software engineer in the UAE (0% local income tax) claimed the 2025 FEIE of $130,000, reducing US federal income tax on the excluded portion to $0.
2. A US employee in Germany (top marginal rate up to 45%) used Form 1116 to claim a Foreign Tax Credit large enough to offset her full US tax liability on German-source wages. Net additional US tax owed: $0.
3. A US independent contractor in Portugal used the FTC to bring income tax to $0, but still owed roughly $14,130 in US self-employment tax on $100,000 of net earnings. Neither FTC nor FEIE reduces SE tax.

 

For a side-by-side comparison built around real numbers, see Foreign Tax Credit vs. FEIE.

Self-employment tax for US contractors working abroad

A US citizen classified as an independent contractor owes self-employment tax of 15.3% on 92.35% of net earnings, even when the FEIE eliminates all income tax liability.

The FEIE does not reduce SE tax abroad under any circumstances.

Three SE tax facts that catch a US contractor working abroad off guard:

• SE tax equals 12.4% Social Security plus 2.9% Medicare, applied to 92.35% of net self-employment income on Schedule SE. The 12.4% Social Security portion applies up to the annual Social Security wage base ($176,100 for 2025).
• A US totalization agreement with the host country can eliminate the Social Security half of the SE tax. As of 2026, the US has 30 in-force agreements. Covered countries include the UK, Germany, France, Japan, Canada, and Australia. Mexico, the UAE, Thailand, Singapore, India, and China are not covered.
• Worker classification (employee vs. contractor) is determined by the IRS using behavioral control, financial control, and relationship-type tests, not by the title written in the contract.

For totalization mechanics on a return, including the Certificate of Coverage process, see our guide to SE tax and totalization exemptions for self-employed expats.

State taxes when you move abroad

Moving abroad does not automatically terminate state income tax liability.

A handful of sticky states, most notably California, New Mexico, South Carolina, and Virginia, apply income tax to former residents who have not permanently severed domicile, even when those residents live abroad full-time and earn all income from a foreign source. New York applies a separate trap based on physical presence and a permanent place of abode.

State-specific traps to know:

• California: The Franchise Tax Board treats domicile as the controlling factor. Retaining a California driver's license, voter registration, or a home available for personal use after departure is grounds for the FTB to assert continued residency. Top marginal rate: 13.3%.
• New York: The statutory resident rule taxes anyone who maintains a permanent place of abode in NY and spends more than 183 days in the state in a tax year, even when domicile is established abroad.
• Virginia, New Mexico, South Carolina: Domicile is the controlling factor. Affirmative steps (updated driver's license, voter registration, banking, mail) are required to break it.

 

Three steps to sever state taxes abroad before departing:

1. Establish a new domicile in a foreign country or a no-income-tax US state (Florida, Texas, Nevada, South Dakota, Wyoming, Washington, Tennessee, Alaska) before the departure date.
2. Cancel voter registration, update your driver's license, close state-specific bank accounts, and move primary mail forwarding out of the old state.
3. File a part-year resident return for the year of departure, mark the exact date you ceased residency, and report your new foreign address.

For deeper state-by-state coverage, see our overview of which states tax residents living abroad and state residency rules by state.

Do non-US citizens owe US tax when working for a US company?

No.  A non-US citizen who performs all work services outside the United States for a US company owes no US federal income tax on that compensation.

The income is classified as foreign-source under IRC Section 861 and falls outside US tax jurisdiction for non-resident aliens. Two forms and one threshold control how this works in practice.

What is Form W-8BEN, and when do you need it?

A non-US citizen working for a US company from outside the United States may need to submit Form W-8BEN to the US payer to document foreign status.

Compensation for services performed entirely outside the US is generally not subject to US income tax withholding; W-8BEN is used for foreign-status documentation on certain payments rather than as a standard payroll form for employee wages.

Three things to know about Form W-8BEN:

• The form must be renewed every three years (it expires on the last day of the third full calendar year after signing).
• The 30% withholding rate under IRC Section 1441 applies to certain US-source payments to foreign persons, not to compensation for services performed entirely outside the US.
• If you perform any portion of services inside the US (a business trip, a training week), that portion of income is US-source and taxable in the US on a pro-rata basis based on workdays.

How the 183-day rule determines where you pay tax

Most countries apply a 183-day rule: a worker who spends more than 183 days in a calendar year in a given country generally becomes a tax resident of that country and owes local income tax on worldwide or local income, depending on the country, regardless of whether the employer is a US company.

NOTE! The 183-day rule is country-specific, not universal; verify the local residency test for each country.

What this means in practice for tax residency abroad:

• The 183-day rule applies in the host country, not in the US.
• Countries without personal income tax (UAE, Bahrain, Cayman Islands) create no income tax obligation in practice, even when the threshold is crossed.
• Germany applies unlimited tax liability from the moment you establish a residence there (a registered apartment plus the intent to stay). The UK uses a Statutory Residence Test with split-year treatment for partial-year residents.

What if you work from the US for a few weeks?

A non-US citizen who meets the substantial presence test under IRC Section 7701(b) becomes a US resident alien subject to US tax on worldwide income, not just US-source income.

The test counts your days in the US over three years on a weighted basis. Take all days physically present in the current year, plus one-third of days from the prior year, plus one-sixth of days from the year before that.

If the total is 183 or more, and you were present in the US at least 31 days in the current year, you are a resident alien and file Form 1040. Below the threshold, you file Form 1040-NR for US-source income only.

What the US employer needs to handle

A US company whose employee relocates abroad has four compliance fronts: payroll tax adjustments, permanent establishment risk in the host country, worker classification review, and immigration verification.

Each one is a separate exposure, and missing any of them creates penalties in either the US, the host country, or both.

Payroll and FICA for employees working abroad

A US employer must continue withholding FICA taxes abroad (Social Security 6.2% and Medicare 1.45%) from a US citizen employee working abroad, unless a totalization agreement between the US and the host country provides an exemption.

Three steps to stop FICA withholding when the employee moves to a totalization country:

1. The employee or employer obtains a certificate of coverage from the US SSA or the foreign social security agency, depending on which system covers the wages.
2. The certificate is submitted to the US employer.
3. The employee pays into the host country's social security system instead of the US FICA.

As of 2026, the US has 30 in-force totalization agreements maintained by the Social Security Administration: Australia, Austria, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, South Korea, Spain, Sweden, Switzerland, the United Kingdom, and Uruguay.

Mexico is not on the list. A US–Mexico agreement was signed in 2004 but has never entered into force.

For non-US citizen employees performing all services outside the US, the employer does not withhold FICA on those wages.

The mechanics of how totalization affects Americans abroad are covered in our guide to Social Security and totalization agreements for US expats.

When a remote employee creates a tax problem for the US company

A US company employee abroad who works regularly from a foreign country can create a permanent establishment (PE) in that country, a taxable corporate presence that triggers income tax registration obligations for the US employer in the host jurisdiction.

This is the single biggest sleeper exposure of remote work: most US employers do not realize that approving a relocation can create a corporate tax footprint for them in the host country.

Three activities that create the highest PE risk for a US employer:

• The employee habitually concludes contracts on behalf of the US company with local clients (dependent agent PE).
• The employee uses a dedicated office at the company's expense in the host country, including a home office covered by a company lease or stipend that gives the company effective use of the space.
• The employee stores company inventory, equipment, or servers at a fixed address in the host country.

Two activity types generally classified as preparatory or auxiliary, which do not create a PE on their own:

• Remote software development or back-office support with no client-facing contract authority.
• Internal administrative tasks with no economic activity directed at the local market.

Germany defines a permanent establishment under §12 of the Abgabenordnung (AO). German case law looks at whether the foreign employer has effective power of disposal over a fixed place of business, which can include a regularly used home office in some fact patterns. The standard is not automatic, but the exposure is real, particularly when the employer pays for the space or directs how it is used.

If the host country asserts a PE, consequences typically include corporate income tax registration, retroactive income tax on profit attributed to the PE, transfer pricing obligations between the US parent and the PE, and, in some countries, payroll registration as a local employer.

Employee or independent contractor: why it matters

A US company that reclassifies a real employee as an independent contractor to avoid international payroll obligations faces IRS misclassification penalties under IRC Section 3509(a). Check the current IRS rules for worker-misclassification penalties before relying on any specific §3509 rates.

The IRS applies three control factors when distinguishing an employee vs. a contractor abroad, set out in the IRS guide to worker classification:

• Behavioral control: whether the company controls how the worker performs the work, including schedule, methods, and tools.
• Financial control: whether the worker has a significant financial investment, has unreimbursed expenses, and works for multiple clients.
• Type of relationship: whether there is a written contract, whether the relationship is open-ended, and whether benefits (health insurance, retirement) are provided.

An employer of record (EOR) is a third party that legally employs the worker in the host country, handles local payroll and taxes, and contracts the worker's services back to the US company.

A properly structured EOR can reduce local payroll and classification risk, but it does not automatically eliminate permanent-establishment risk. The US company pays the EOR fee, typically a percentage of gross compensation.

TFX client scenario

A US SaaS company hired a Ukrainian developer as an independent contractor. The company collected applicable foreign-status documentation, did not issue a Form 1099-NEC (foreign-source payments are not always reportable on Form 1099), and completed a PE risk assessment that found no dedicated office and no contract-signing authority. PE risk was classified as low, and the arrangement was kept as a direct contractor relationship.

Can a US company hire foreign remote workers?

Yes. A US company can legally hire a foreign national who lives and works outside the United States without sponsoring a US work visa.

The US company collects the appropriate tax and payroll forms for the worker's status – W-8BEN is used for certain foreign-status certifications, not as a universal payroll form – and is not required to withhold US income tax on the foreign-source wages, and must assess permanent establishment risk in the worker's country of residence.

Hiring foreign workers remotely is one of the cleanest international compliance setups available, provided the three steps below are followed.

Three hiring structures are available when a US company engages a foreign worker abroad:

• Direct independent contractor agreement: W-8BEN or other applicable foreign-status documentation on file, no US withholding, no Form 1099-NEC required for services performed entirely outside the US.
• Direct foreign employment: the worker is on local payroll in the host country, which requires the US company to register as an employer in that country or have a local legal entity.
• Employer of Record (EOR): a third-party EOR legally employs the worker in the host country, handles local payroll and taxes, and shields the US company from PE and misclassification risk.

Three compliance steps when engaging a foreign worker abroad:

• Collect the appropriate tax and payroll forms for the worker's status; W-8BEN applies to certain foreign-status certifications.
• Verify worker classification using the IRS behavioral, financial, and relationship-type factors.
• Assess PE risk in the worker's country of residence before approving the arrangement.

A common mistake

Issuing Form 1099-NEC to a foreign contractor for services performed entirely outside the US. Foreign-source payments are not always reportable on Form 1099 – see our full guide before issuing one.

Working remotely from a specific country

The cleanest combinations for US workers are countries that either have no personal income tax and so create no host-country liability, or have a totalization agreement that prevents duplicate Social Security contributions; the worst are non-treaty, income-taxing countries where you owe in both systems at once.

Country-specific tax rates, social security coverage, and permanent-establishment exposure vary by country and local law; verify each country before relying on this chart.

Working from Mexico for a US company

A US citizen working remotely from Mexico for a US company owes US federal income tax on all wages and can use the FEIE ($130,000 for 2025) or the Form 1116 FTC to offset double taxation.

Mexico taxes the worker as a Mexican tax resident once physical presence and ties cross the residency threshold. Mexico tax residency depends on the current local residency rules and your facts; verify the threshold before relying on the 183-day summary.

Three obligations to plan for if you are a US citizen working from Mexico:

• US federal income tax on worldwide wages, offset by FEIE or FTC.
• Mexican income tax at 1.92%–35% once Mexican tax residency is established.
• US FICA or SE tax continues. There is no in-force US–Mexico totalization agreement, so you may end up paying into both US Social Security (or SE tax) and Mexican IMSS at the same time. This is one of the higher hidden costs of relocating to Mexico as a US worker.

Tax forms you need when working abroad for a US company

Eight forms cover the primary reporting obligations across both worker types and the employer side.

 

FBAR is filed directly through the FinCEN BSA E-Filing portal, not with the IRS.

Filing deadlines for Americans working abroad

The June 15 expat extension is automatic and requires no separate filing, only a statement attached to your return; interest on any unpaid tax still runs from April 15.

What to remember when working abroad for a US company

• US citizens owe US tax on all foreign wages. FEIE ($130,000 for 2025, $132,900 for 2026) or FTC reduces or eliminates double taxation.
• FEIE does not reduce self-employment tax. A US contractor abroad still owes 15.3% SE tax regardless of any FEIE election.
• Non-US citizens who perform all work outside the US owe no US income tax on that compensation. Form W-8BEN is used for foreign-status documentation on certain payments.
• California, New York, Virginia, New Mexico, and South Carolina may continue taxing former residents who have not formally severed domicile.
• US employers should assess permanent establishment risk before approving a relocation. Germany's §12 AO can treat a regularly used home office as a PE depending on the facts.
• FICA continues for US employees abroad unless a totalization agreement covers the host country (30 in force as of 2026) and a certificate of coverage has been issued by the US SSA or the foreign social security agency. Form 673 is for income-tax withholding on qualifying foreign earned income, not FICA.

If you want a tailored answer for your situation, your country, your income type, your filing status, speak with a TFX expat tax expert. For a sense of what US expats actually pay after FEIE, FTC, and treaty benefits, see how much tax US citizens abroad actually pay.

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