Taxes, Payroll Costs Essential to Expatriate Assignments

US-based employees heading outbound on expatriate assignments leave behind many tax and pay considerations for their employers, two payroll professionals said May 14.

The US is one of the few countries that taxes citizens’ worldwide income, meaning their income must always be reported to the Internal Revenue Service, said Patrick Landers, CPP, a national tax partner at RSM US.

US citizens and permanent residents remain subject to federal income tax withholding while abroad unless the other country requires withholding or they are covered by the foreign earned income or housing exclusions, Landers said.

Federal withholding is not required on the amounts of the exclusions if the employee meets the requirements, and the employer should document that the employee meets the requirements, Landers said. That documentation is IRS Form 673, Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911, filled out by employees and kept by the employer, Landers said.

The 2026 foreign earned income exclusion limit is $132,900, meaning that US citizens and resident aliens living abroad may exclude that amount from US federal income taxes. “For good or bad, a lot of expats make more than $132,000" when including payments beyond their base salary such as housing, travel, and school costs, Landers said. “Someone that made $80,000 a year can end up with $200,000 or $300,000 worth of taxable compensation,” he said.

Once an employee passes the applicable limit, the employer should begin withholding federal US income tax if the employee is in a country without income tax. Otherwise, the employer should document that the employee is subject to withholding in the host country, Landers said.

Similarly, how much an employer pays for housing can be “a large number,” Landers said. The normal maximum amount that can be excluded is the difference between the exclusion limit, which is $39,870 in 2026, and the base housing amount, which is $21,264 in 2026, for a maximum exclusion of $18,606 in 2026, he said.

The IRS releases an list of cities that qualify for a higher limit than the annual exclusion. For 2026, that information is found in Notice 2026-25.

“A lot of times, companies end up paying more in housing costs than [they] can exclude from taxation,” Landers said.

Tax Considerations

When withholding is required in the host country, the employee claims a credit on their US tax return for taxes paid to another country, and if the host country’s rates are higher it can offset any US tax liability, Landers said.

Landers said he has had clients that put notes in employees’ files citing the Internal Revenue Code section they are relying on to not withhold US tax when withholding is required in the other country.

Additionally, US citizens and permanent residents can claim additional allowances on Form W-4, Employee’s Withholding Certificate, to account for the income exclusions or taxes paid to another country, Landers said.

The unemployment insurance program to which an expatriate employee is subject may change to the company’s headquarters based on the UI localization test if an assignment is long enough, said Erica Stohler, CPP, a senior manager at RSM US.

Stohler also emphasized that only income that is taxable in the US should be reported on an employee’s Form W-2, Wage and Tax Statement, which may not be all compensation an employee receives.

Landers and Stohler spoke at PayrollOrg’s 44th Payroll Congress in Nashville, Tennessee.

Employers should check totalization agreements to see if they can continue to pay Social Security and Medicare taxes for an expatriate employee, which can generally be done for assignments of up to five years under the agreements, or must pay into the host country’s social insurance system, Landers said.

Generally, employees of a non-US entity are not covered by Social Security, but American employers can extend coverage to US citizens and permanent residents working for an affiliated foreign entity, Landers said. The American employer does so by filing IRS Form 2032, Contract Coverage Under Title II of the Social Security Act, but the request is permanent, Landers said. The form’s instructions indicate it can only be terminated if the foreign entity is no longer affiliated with the American employer. “There may be reasons why you don’t want to do that,” Landers said of filing Form 2032.

Employers generally prefer tax equalization plans that ensure an expatriate’s taxes are no better or no worse than at home. The alternative tax protection, where an employee’s taxes are only no worse off, fell out of favor once employees would only accept assignments to countries where they would be better off, Landers said. He recommended that employers have a formal tax equalization policy and have employees sign something indicating that they agree to it.

A common practice for employees outbound from the US is withholding hypothetical tax, where the employer withholds federal income tax an employee would have paid in the US while helping with the host country’s taxes, Landers said.

Applying a hypothetical tax helps avoid situations where the employee would owe the employer at the end of the year. “You would much rather be in a position where you’re writing [the employee] a check at the end of the year than trying to collect something from them,” Landers said.

Hypothetical tax is less common for employees outbound from other countries because they may not be taxed on worldwide income, Landers said.