Form 673

Intro to Form 673?

Form 673, officially titled “Statement For Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911,” is a specialized tax document used by U.S. citizens or residents working abroad. This form allows qualifying individuals to claim an exemption from federal income tax withholding on their foreign earned income. For HR professionals managing global workforces, understanding Form 673 is essential for properly handling payroll and tax compliance for U.S. employees stationed in foreign countries.

Definition of Form 673

Form 673 (Statement For Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911) is an Internal Revenue Service (IRS) document that enables qualified U.S. citizens or residents working abroad to request that their employers stop withholding U.S. federal income taxes from their foreign earned income.

The form is directly connected to the Foreign Earned Income Exclusion (FEIE), a provision in the U.S. tax code that allows qualifying individuals to exclude a certain amount of foreign earned income from their U.S. taxable income ($120,000 for tax year 2023, with annual adjustments for inflation).

To use Form 673, an individual must meet specific eligibility requirements:

• Be a U.S. citizen or resident alien
• Have a tax home in a foreign country
• Meet either the bona fide residence test (residing in a foreign country for an uninterrupted period that includes an entire tax year) or the physical presence test (physically present in a foreign country for at least 330 full days during 12 consecutive months)
• Reasonably expect to qualify for the foreign earned income exclusion

The form must be filed with the employer, not the IRS. Once accepted, it authorizes the employer to stop withholding federal income tax on foreign earned income up to the exclusion amount. It remains in effect until the employer is notified of a change in the employee’s eligibility status.

It’s important to note that Form 673 only applies to income tax withholding—it does not exempt employees from Social Security and Medicare taxes (FICA), which may still apply depending on specific international agreements and the employee’s situation.

Importance of Form 673 in HR

For HR professionals, Form 673 plays a significant role in managing global workforce tax compliance and payroll operations:

Global Mobility Program Management: Form 673 is a key component of international assignment management. HR teams must incorporate this form into their expatriate administration processes to ensure proper tax treatment for U.S. employees working abroad.

Payroll Compliance: Proper handling of Form 673 ensures that the organization correctly implements tax withholding for international employees. Failure to process these forms correctly can lead to over-withholding (creating unnecessary financial burden for employees) or under-withholding (potentially creating tax liabilities).

Employee Financial Wellbeing: By facilitating the appropriate use of Form 673, HR departments help eligible employees maximize their take-home pay while working abroad. This supports financial wellbeing and reduces the need for employees to seek large tax refunds after filing their annual returns.

Expatriate Policy Development: Understanding Form 673 requirements helps HR develop comprehensive expatriate policies that address tax equalization, tax protection, and other tax-related aspects of international assignments.

Compliance Documentation: Proper maintenance of Form 673 records provides documentation of the organization’s due diligence in following tax regulations for internationally mobile employees, which is essential for internal audits and potential IRS inquiries.

Global Payroll Coordination: HR teams must coordinate Form 673 processing between U.S. payroll systems and international payroll operations, ensuring consistent application of tax withholding policies across different countries.

Examples of Form 673

Example 1: Software Engineer on Long-Term Assignment
Sarah, a software engineer for a U.S. technology company, is assigned to the company’s office in Singapore for a three-year project. As a U.S. citizen who will clearly meet the physical presence test, she completes Form 673 and submits it to her employer’s HR department before departing. The HR team processes the form and updates the payroll system to stop withholding federal income tax on her Singapore-earned salary (up to the exclusion limit). The company continues to withhold Social Security and Medicare taxes as required by U.S. law. During her annual tax compliance review, HR confirms that Sarah still qualifies for the exemption and maintains the Form 673 in her employment records as documentation of her withholding status.

Example 2: Sales Executive with Multiple Country Responsibilities
Marcus is a U.S. citizen working as a regional sales executive for a multinational corporation. His role requires him to work from the company’s Dubai office while managing sales teams across the Middle East. After establishing residency in Dubai for a full calendar year, he becomes eligible for the foreign earned income exclusion under the bona fide residence test. Marcus completes Form 673 and submits it to his employer. The HR department coordinates with both U.S. and UAE payroll teams to implement the correct withholding adjustments. They also ensure Marcus understands that his eligibility must be recertified annually and that income exceeding the exclusion amount remains subject to normal U.S. tax withholding.

Example 3: Remote Worker Relocating Internationally
Emma, a U.S. citizen working remotely for a U.S.-based digital marketing agency, decides to relocate to Portugal while continuing her employment. After learning about the foreign earned income exclusion, she researches the requirements and determines she will likely qualify under the physical presence test after being in Portugal for a full year. Six months into her stay, Emma submits Form 673 to her employer, indicating her expectation to meet the 330-day physical presence requirement. The HR department reviews her situation carefully, consulting with their tax advisors to confirm her eligibility timeline. They explain that they cannot stop withholding until she meets the full test requirements, but help her understand how to claim the exclusion when filing her tax return, which may result in a refund of withheld taxes for the qualifying period.

How HRMS platforms like Asanify support Form 673

Modern HRMS platforms like Asanify provide comprehensive support for managing Form 673 and related global workforce tax processes:

Global Employee Records Management: Advanced HRMS systems maintain detailed records of internationally assigned employees, including their work locations, assignment durations, and tax status. These capabilities help track Form 673 eligibility and ensure proper documentation.

Document Management: Secure digital storage for tax forms, including Form 673, ensures that these critical documents are properly maintained, easily accessible when needed, and protected according to data privacy requirements. Version control features track resubmissions and updates to the form.

Automated Compliance Alerts: HRMS platforms can generate notifications when internationally assigned employees approach eligibility thresholds for Form 673 (such as approaching the one-year mark in a foreign country) or when existing forms need recertification.

Payroll Integration: Seamless integration between employee records and payroll systems ensures that Form 673 submissions automatically trigger appropriate changes to tax withholding. This integration minimizes manual processing and reduces the risk of errors in implementing withholding changes.

Global Mobility Dashboards: Comprehensive reporting tools provide HR and payroll teams with visibility into the status of all international employees, including their Form 673 status, helping ensure consistent application of tax withholding policies across the global workforce.

Attendance Tracking: Sophisticated HRMS platforms include global attendance management features that track days present in various countries, which can help document compliance with the physical presence test requirements for Form 673 eligibility.

Knowledge Resources: Built-in resources and guides help HR teams understand Form 673 requirements and provide accurate guidance to employees about their eligibility and the implications for their tax situation.

FAQs about Form 673

Who is eligible to submit Form 673?

U.S. citizens or resident aliens working abroad who reasonably expect to qualify for the Foreign Earned Income Exclusion under Section 911 are eligible to submit Form 673. To qualify, individuals must have their tax home in a foreign country and meet either the bona fide residence test (living in a foreign country for an uninterrupted period including an entire tax year) or the physical presence test (physically present in a foreign country for at least 330 full days during 12 consecutive months). The individual must also reasonably expect their foreign earned income to be less than the maximum exclusion amount for the tax year ($120,000 for 2023, adjusted annually for inflation).

Does Form 673 need to be submitted annually?

Form 673 does not necessarily need to be submitted annually, but it should be renewed or resubmitted whenever there are significant changes in circumstances. The form includes a statement certifying that the employee expects to qualify for the foreign earned income exclusion. If this expectation changes—due to relocation, changes in assignment, or other factors affecting eligibility—a new form should be submitted. Many employers require annual recertification as a best practice to ensure continued eligibility. The form remains in effect until the employer is notified of changes in the employee’s situation that would affect eligibility.

How does Form 673 interact with tax treaties?

Form 673 and tax treaties address different aspects of international taxation. Form 673 relates specifically to U.S. tax withholding on foreign earned income for U.S. citizens or residents working abroad, based on the Foreign Earned Income Exclusion provision in U.S. tax law. Tax treaties, by contrast, are agreements between the U.S. and other countries that determine which country has the right to tax different types of income, potentially reducing or eliminating double taxation. An employee may be eligible to benefit from both Form 673 provisions and tax treaty provisions simultaneously, depending on their specific situation. However, these are separate mechanisms with different qualification requirements and processes.

What are the employer’s responsibilities regarding Form 673?

Employers have several key responsibilities regarding Form 673: They must review submitted forms to ensure basic completion; implement appropriate changes to federal income tax withholding based on valid forms; maintain copies of the forms in employee records; continue withholding for income exceeding the exclusion limit; resume normal withholding if notified that the employee no longer qualifies; and continue to withhold for Social Security and Medicare taxes unless specific exemptions apply. Employers are not required to verify all aspects of an employee’s eligibility claim but should exercise reasonable diligence in processing these forms. The form is kept by the employer and not submitted to the IRS.

What happens if an employee submits Form 673 but ultimately doesn’t qualify for the foreign earned income exclusion?

If an employee submits Form 673 but ultimately fails to qualify for the foreign earned income exclusion, they will be responsible for paying any U.S. tax liability that should have been withheld, potentially including interest and penalties. The employee should inform their employer as soon as they determine they won’t qualify, so normal withholding can resume. Additionally, they should consider making estimated tax payments to cover the shortfall. From the employer’s perspective, if the form was accepted in good faith, the employer generally isn’t liable for the underwithholding. However, employers should implement reasonable procedures to ensure forms are only accepted from employees with legitimate expectations of qualifying for the exclusion.